What is Non-Marginable Securities?
361 reads · Last updated: December 5, 2024
Non-marginable securities are not allowed to be purchased on margin at a particular brokerage, or financial institution. They must be fully funded by the investor's cash.Most brokerage firms have internal lists of non-marginable securities, which investors can find online or by contacting their institutions. These lists will be adjusted over time to reflect changes in share prices and volatility. Holdings in non-marginable securities do not add to the investor's margin buying power.
Definition
Non-marginable securities are those that cannot be purchased on margin at specific brokerage firms or financial institutions. They must be fully funded by the investor's cash. Most brokerage firms have an internal list of non-marginable securities, which investors can find online or by contacting their institution. These lists are adjusted over time to reflect changes in stock prices and volatility. Holding non-marginable securities is unrelated to an investor's margin buying power.
Origin
The concept of non-marginable securities originated from the need for risk management in financial markets. As margin trading became popular, financial institutions recognized the high-risk nature of certain securities and thus established the classification of non-marginable securities to protect both investors and institutions from excessive leverage.
Categories and Features
Non-marginable securities typically include highly volatile stocks, small-cap stocks, certain types of bonds, and newly issued securities. Their main feature is that they require full cash payment and cannot be traded using borrowed funds. The advantage of these securities is the reduced leverage risk for investors, but they also limit the investor's purchasing power.
Case Studies
Case Study 1: During the 2008 financial crisis, many financial institutions classified a large number of high-risk financial products as non-marginable securities to mitigate the impact of market volatility on investors. Case Study 2: Stocks from certain emerging markets are often classified as non-marginable securities due to their high volatility and uncertainty, requiring investors to pay in full to invest.
Common Issues
Investors often misunderstand the relationship between non-marginable securities and margin accounts, thinking they can be purchased on margin. In reality, non-marginable securities must be paid for in full and cannot be bought with borrowed funds. Additionally, investors should regularly check their broker's list of non-marginable securities, as these lists change with market conditions.
