 Trading on margin involves additional risk, so before placing any trades, be sure you understand the requirements and industry regulations that govern margin borrowing. A margin account is essentially a loan made by a brokerage firm to an account owner. To add margin to your account, you'll need to first complete a margin agreementLog In Required that confirms your understanding of the risks involved. Once margin has been added to your account, its subject to the rules of the Federal Reserve Board, the Financial Industry Regulatory Authority (FINRA), and securities exchanges such as the New York Stock Exchange, as well as your own brokerage firm's margin policies. In many cases, a brokerage firm's margin policies may be more stringent than those of the regulators. To purchase securities on margin and continue to hold them in your margin account, you must meet specific margin requirements. For new purchases, the initial Regulation T margin requirement is 50% of the total purchase amount. So if you wanted to buy $10,000 of ABC stock on margin, you would first need to deposit $5,000 or have equity equal to $5,000 in your account. Margin accounts require a minimum of $2,000 in net worth to establish a long stock position. FINRA Rule 4210 requires that you maintain a minimum of 25% equity in your margin account at all times. Most brokerage firms maintain margin requirements that meet or, in many cases, exceed those set forth by regulators. They do this to protect themselves from market risk and the risk that certain customers will incur a margin debt that they are unable to pay back. Firms typically determine margin requirements by assessing risk at the security level or at the account level. Calculating requirements at the security level takes into account a security’s price, volatility, and number of outstanding shares, along with many other factors. This information is used to create a single margin requirement across the firm. The main benefit of this method is the simplicity in maintaining and communicating this information to customers. Calculating margin requirements at the account level may provide a more accurate and true representation of risk. This method goes beyond the individual security level characteristics and analyzes risk and the corresponding margin requirements based on each customer's overall account structure. The criteria used to assess this risk may vary from broker to broker, but generally firms use factors such as account concentration, security liquidity, ownership concentration, industry concentration, and a security's volatility. Additional factors pertaining to certain securities, such as leveraged ETFs or those from distressed sectors and issuers, could increase the house requirements for these securities. These requirements can change at any time, so be sure you understand your firm's unique margin policies before you start trading on margin. Learn more by watching How margin requirements work in practice (1:59). Understanding the potential benefits, risks, and requirements of maintaining a margin account is just the first step in getting started with margin. Before you proceed, you also need to know what can happen when the market moves against your margin positions. For more on this topic, see Avoiding and managing margin calls.
The terms on which firms can extend credit for securities transactions are governed by federal regulation and by the rules of FINRA and the securities exchanges. Some securities cannot be purchased on margin, which means they must be purchased in a cash account, and the customer must deposit 100 percent of the purchase price. In general, under Federal Reserve Board Regulation T, firms can lend a customer up to 50 percent of the total purchase price of a margin security for new, or initial, purchases. The rules of FINRA and the exchanges supplement the requirements of Regulation T by placing maintenance margin requirements on customer accounts. Under these rules, as a general matter, the customer's equity in the account must not fall below 25 percent of the current market value of the securities in the account. Otherwise, the customer may be required to deposit more funds or securities to maintain equity at the 25 percent level (referred to as a margin call). Failure to do so may cause the firm to liquidate the securities in the customer's account in order to bring the account's equity back up to the required level. The FINRA rules governing margin accounts are as follows:
The Portfolio Margin and Intraday Funding section of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources. Interpretations of FINRA's Margin Requirements RuleFINRA Rule 4210 (Margin Requirements) describes the margin requirements that determine the amount of collateral customers are expected to maintain in their margin accounts, including both strategy-based margin accounts and portfolio margin accounts. The rule explains the margin requirements for equity and fixed income securities, along with options, warrants and security futures. The Interpretations of Rule 4210 contain both the interpretation of the rule and the actual rule text. These are published as guidance and assistance for the reader to better understand the application of the rule. FINRA Rule 4521 requires that member firms that carry customer margin accounts must submit — via the Customer Margin Balance Form — the following numbers:
After collecting this data via the Customer Margin Balance Forms, FINRA displays it in aggregate form on our Margin Statistics page. See Margin Balance Reporting: Frequently Asked Questions under FINRA Rule 4521(d) (published April 13, 2021) and Regulatory Notice 10-08 (Customer Margin Accounts) for more information. Request Access to the Customer Margin Balance Reporting Form Margin Disclosure StatementsPursuant to FINRA Rule 2264 (Margin Disclosure Statement), no member shall open a margin account, as specified in Regulation T, for or on behalf of a non-institutional customer, unless, prior to or at the time of opening the account, the member has furnished to the customer, individually, in paper or electronic form, and in a separate document (or contained by itself on a separate page as part of another document), the specified margin disclosure statement. In addition, any member that permits non-institutional customers either to open accounts online or to engage in transactions in securities online must post such margin disclosure statement on the member's Web site in a clear and conspicuous manner. Pursuant to FINRA Rule 4210(g), on or before the date of the initial transaction in a portfolio margin account, a member must provide customers with a special written disclosure statement describing the nature and risks of portfolio margining. The disclosure statement must include an acknowledgement for all portfolio margin account owners to sign, attesting that they have read and understand the disclosure statement. Customers must also attest that they agree to the terms under which their portfolio margin account is provided. Members must retain this signed acknowledgement and record the date of receipt. DOWNLOAD FINRA'S MODEL PORTFOLIO MARGIN DISCLOSURE STATEMENT CONTACT OGCFINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see Interpreting the Rules for more information.
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The criteria for determining whether an OTC security may be purchased on margin is established by
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