Stock Trading Margin Limits
Buying stock on the margin involves borrowing a portion of the money necessary to buy the stock. The borrowed money is called a margin loan. Buying stock on the margin increases the profit percentage if the stock goes up in value.
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Rules
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The rules governing margin accounts are set by the Federal Reserve Board, the Financial Industry Regulatory Authority (FINRA), the stock exchanges and individual brokerage firms.
Buying
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The Federal Reserve Board limits the maximum amount that can be borrowed to purchase stock to 50 percent of the purchase cost. An investor must put in the other 50 percent as equity.
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Maintenance
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The maintenance percentage is the minimum requirement for investor equity in an account. FINRA sets the maintenance at 25 percent. Individual brokerages may have a maintenance percentage as high as 40 percent. At no time can the investor equity fall below $2,000.
Significance
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The investor's equity cannot fall below the maintenance percentage. The broker will make a margin call to the investor to deposit more cash or securities if the account falls below the maintenance percentage.
Example
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The investor buys 200 shares of a $60 stock on margin. The investor puts in 50 percent, or $6,000, and has a margin loan for the other $6,000. The share price falls to $35. The equity is now the $7,000 value of the stock minus the $6,000 loan: $1,000. A 25 percent margin requirement of $7,000 is $1,750. The investor would receive a margin call to deposit money or securities.
Warning
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If an investor does not maintain the maintenance margin requirements, the brokerage firm has the right to sell any securities in the account to increase the equity. Brokers have the right to make the sales without giving the investor time to increase the account equity by making further deposits.
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