Stock Purchase Margin Requirements

Making a stock purchase on margin is a way for traders to increase the return on their investments. When you make a stock purchase on margin, you borrow part of the money to buy the shares from your broker. This does increase risk as well as possible profit. If the stock price drops, you take all of the loss. Due to the added risk and the borrowing of money, there are special requirements for making a stock purchase on margin.

Margin Account

A margin account is required to make margin purchases. Brokers typically require a larger minimum deposit and higher credit score, especially from day traders.

Margin Requirement

Under the Federal Trade Commission (FTC) rules, you must put up a minimum percentage of the purchase price. Normally this is 50 percent, but may vary depending on market conditions.

Hypothecation

To trade stocks on margin, you must sign a hypothecation agreement with your broker. This agreement makes all funds and securities in your account collateral for the borrowed funds.

Maintenance Margin

If the stock falls and your equity drops below 25 percent, you will get a margin call, which means that you must put up more money or your broker will sell the stock.

Considerations

Brokers charge interest on money borrowed to buy stocks on margin. Brokerage firms may increase margin requirements above FTC minimums, especially if the market is particularly volatile.

Resources

• SEC: Borrowing Money to Buy Stocks