9.3 Margin Accounts

What Margin Is

A margin account lets a customer borrow from the broker-dealer to buy securities, pledging those securities as collateral. The customer deposits part of the cost (the margin), borrows the rest, and pays interest on the borrowed debit balance. Margin magnifies both gains and losses, so the exam emphasizes the credit limits and the documents that authorize the loan.

Opening a Margin Account

Hypothecation means the customer pledges securities to the broker; the broker may then rehypothecate (repledge to a bank) customer securities up to 140% of the customer's debit balance. The loan consent is the only one of the three a customer can decline and still open the account.

Regulation T Initial Margin

Regulation T sets initial margin at 50% of the purchase price for marginable equities. But there is a floor: the customer must deposit the greater of 50% or $2,000, and never more than the full purchase price.

Trap to remember: if 50% would be under $2,000, deposit $2,000; if the entire purchase is under $2,000, the customer simply pays in full — the firm cannot lend on so small a position.

FINRA Maintenance Requirements

After the purchase, maintenance margin keeps a cushion of equity:

These are floors. Most firms impose higher house requirements (often 30–40% on longs). Firm requirements may always be stricter than the regulatory minimum, never looser.

Types of Margin Calls

• Federal (Reg T) call: the initial 50% was not met on a new purchase; the customer must deposit to satisfy the 50% requirement, generally by the settlement deadline. If unmet and not extended, the firm liquidates and a 90-day freeze applies.
• Maintenance (FINRA) call: equity has fallen below 25% long / 30% short; the customer must restore equity to the maintenance level.
• House call: equity dropped below the firm's stricter internal threshold.

A customer can meet a call by depositing cash, depositing fully paid marginable securities, or selling securities to reduce the debit — or any combination. Cash is dollar-for-dollar; depositing securities counts at their loan value (typically marginable securities cover the call at about 2-to-1 because only 50% is loanable).

Margin Interest

Interest accrues daily on the debit balance, based on the broker call loan rate plus a spread, and is billed (usually monthly) to the account. For taxable investors, margin interest may be deductible as investment interest expense, limited to net investment income.

Securities That Cannot Be Bought on Margin

Low-priced/penny stocks and very thinly traded issues are also commonly excluded or given little loan value by house rules.

Leverage: Reward and Risk

Leverage lets a customer control more securities with less cash and keep holdings rather than sell. But losses can exceed the original deposit, calls can force sales at bad prices, and interest erodes returns. In a sharp decline, a margin customer can owe more than they invested.

Long Versus Short Margin Accounts

Margin works for both bullish and bearish strategies. A long margin purchase borrows dollars to own more stock, so the customer owes a debit balance and profits if prices rise. A short sale borrows shares and sells them, creating a credit balance, and profits if prices fall. Short selling can only occur in a margin account — never a cash account — because the customer must post collateral and the broker must borrow the shares to deliver. Short selling carries theoretically unlimited risk, since a stock's price has no ceiling, which is why the maintenance requirement on shorts (30%) is higher than on longs (25%).

Settling and Funding the Margin Deposit

The initial Reg T deposit is due by the standard settlement date, T+1, the same deadline as a cash purchase. A federal call that goes unmet and is not granted an extension forces the firm to liquidate enough of the position to satisfy the call and then freeze the account for 90 days. Customers should therefore fund margin deposits the same way they fund cash purchases: with settled funds available before settlement.

Worked Margin Purchase, Start to Finish

Consider a customer buying 200 shares of a $50 stock — a $10,000 purchase:

1. Reg T initial requirement = 50% × $10,000 = $5,000 deposit.
2. The broker lends the other $5,000 (the opening debit balance).
3. The customer signs the margin and hypothecation agreements before the trade settles.
4. The broker may rehypothecate the customer's shares up to 140% of the $5,000 debit, or $7,000 of market value.
5. Interest accrues daily on the $5,000 debit at the broker call rate plus the firm's spread.

Common Margin Traps

• A purchase whose 50% is below $2,000 requires the $2,000 minimum, not the 50% figure.
• A purchase whose total price is below $2,000 must be paid in full — no loan at all.
• House requirements are always equal to or stricter than FINRA minimums, never looser.
• New issues are not marginable for the first 30 days of trading.
• Only the loan consent is optional; the margin and hypothecation agreements are mandatory.

On the Exam

The most-tested items: the deposit is the greater of 50% or $2,000 (and full payment below $2,000); maintenance is 25% long and 30% short; the hypothecation agreement lets the broker pledge securities while the loan consent is optional; and rehypothecation is capped at 140% of the debit balance.