Search
Close this search box.

Table of Contents

Non-Marginable Securities



Definition

Non-Marginable Securities are a type of investment that cannot be purchased on margin at a brokerage firm. These are generally considered to be riskier or less stable investments such as penny stocks or over-the-counter bulletin board securities. The investor must fully fund the purchase of these types of securities up front without the aid of borrowed money.

Phonetic

The phonetic pronunciation of “Non-Marginable Securities” is: Non: Nah-nMarginable: Mar-jin-uh-bullSecurities: Si-kyur-i-tees

Key Takeaways

<ol><li>Non-marginable securities are types of securities that cannot be bought on margin at a brokerage firm. These include initial public offerings (IPOs), over-the-counter bulletin board (OTCBB) securities and penny stocks. Investing in non-marginable securities needs to be done completely with the investor’s own funds.</li><li>Non-marginable securities can be high-risk since they are often difficult to predict, can lack liquidity and are less regulated, like penny stocks. Typically, these securities are not deemed marginable as they are too unpredictable, can be unstable or lack sufficient financial history or stability to be evaluated for margin trading. This means investors have to understand the full financial risk of their investments as there will be no financial leverage from a broker.</li><li>With non-marginable securities, because they cannot be bought on margin, investors are protected from margin calls. A margin call is when a broker asks for a repayment of the loan made to the investor, which can lead to major financial downfall if the investor does not have sufficient funds. This level of protection can be seen as an advantage for investing in non-marginable securities.</li></ol>

Importance

Non-Marginable Securities are important in business finance because they impact the buying power and leverage of an investor in the market. These are specific types of securities, such as initial public offerings (IPOs) or over-the-counter bulletin board (OTCBB) stocks, that cannot be bought with borrowed money (on margin) due to their higher risk or volatility. Understanding which securities are classified as non-marginable is crucial for traders and investors as it directly affects their capacity to borrow against these securities. It also affects their overall risk management strategy, as non-marginable securities may require a greater upfront investment and can lead to liquidity issues if the investor needs to quickly sell their holdings. Therefore, Non-Marginable Securities represent an important concept both in securities trading and investment strategy development.

Explanation

Non-marginable securities play a crucial role in the financial landscape by providing stability and limiting risk. They represent investment tools that cannot be purchased on margin from an investment broker. In other words, they must be fully paid for at the time of purchase; hence, they reduce borrowing and maintain financial balance in the market. This purchasing condition makes non-marginable securities a less risky proposition for both investors and brokers, as it removes the potential for losses that might result from price fluctuations if bought on margin.Additionally, non-marginable securities are used as a measure to regulate market behavior and ensure financial discipline. Because non-marginable securities are ineligible for margin trading, they may not be used as collateral in a margin account. This feature thus prevents excessive borrowing and speculative trading, protecting the investor from taking on undue financial risks and maintaining market equilibrium. Furthermore, they enable investors with lower risk tolerance to partake in the trading process without fear of potential losses due to price changes in marginable securities. Thus, non-marginable securities have a significant role in maintaining market stability and investor safety.

Examples

1. Precious Metals Investment: Companies like Glencore or Barrick Gold Corp produce precious metals like gold, silver, palladium, etc. While they can be excellent investments, these stocks may sometimes be classified as non-marginable securities because the price of the precious metals market may not correspond directly to the stock market, making them harder to predict and therefore riskier for brokers to offer on margin.2. Initial Public Offerings (IPOs): An example of a non-marginable security in this case could be a newly public company, such as Airbnb or DoorDash when they first went public. These stocks often carry a higher risk because they lack the established track record of a company that has been traded in public markets for years. As a result, brokers hesitate to lend money against such stocks.3. Over-the-Counter Stocks: Some companies, like those traded on the Over-the-Counter Bulletin Board (OTCBB) or the Pink Sheets, are considered non-marginable securities. These companies don’t meet the listing requirements set by the New York Stock Exchange or Nasdaq and thus, they’re considered too risky to be bought on margin. One such example might be a small-cap pharmaceutical company that is still in the developmental phase and doesn’t have any approved drugs in the market.

Frequently Asked Questions(FAQ)

What are Non-Marginable Securities?

Non-Marginable Securities are investments that brokerage firms do not allow investors to purchase on margin due to their high risk. This includes instruments like recent IPOs, OTCBB stocks, penny stocks, and certain foreign securities.

Why are some securities non-marginable?

Securities are typically non-marginable due to their heightened risk or lack of liquidity. These high-risk securities may become difficult to sell, especially at a reasonable price, which would make them a risky option for lenders.

Can I trade non-marginable securities through a margin account?

Yes, you definitely can. However, you must fully pay for them in cash since they’re not eligible for margin borrowing.

How do I know if a security is non-marginable?

Brokerages will usually have a list of non-marginable securities. You could also contact your brokerage for this information.

What happens if non-marginable securities are included in a margin call?

If you receive a margin call on your account, non-marginable securities will not count towards your margin equity, as you can’t borrow against their value. Therefore, you will need to cover the call with cash or other marginable securities.

Can non-marginable securities become marginable?

Yes, if the risk or liquidity of the security improves over time or meets specific criteria set by the brokerage firm or regulatory body, the security may become marginable.

Can I trade non-marginable securities in a cash account?

Yes, you can trade non-marginable securities in a cash account, given that you are paying in full for the securities and not borrowing from the broker, as with margin trading.

Are non-marginable securities less profitable?

Not necessarily. The profitability of a security, marginable or non-marginable, depends on its performance and not on its eligibility for margin trading. It’s vital to conduct thorough research and due diligence before investing.

How do regulatory bodies factor into deeming securities as non-marginable?

Regulatory bodies such as the SEC and FINRA provide regulations that brokerage firms must follow. If a security doesn’t meet these standards set by regulators, it may be deemed non-marginable by brokerage firms.

Related Finance Terms

Sources for More Information


About Our Editorial Process

At Due, we are dedicated to providing simple money and retirement advice that can make a big impact in your life. Our team closely follows market shifts and deeply understands how to build REAL wealth. All of our articles undergo thorough editing and review by financial experts, ensuring you get reliable and credible money advice.

We partner with leading publications, such as Nasdaq, The Globe and Mail, Entrepreneur, and more, to provide insights on retirement, current markets, and more.

We also host a financial glossary of over 7000 money/investing terms to help you learn more about how to take control of your finances.

View our editorial process

About Our Journalists

Our journalists are not just trusted, certified financial advisers. They are experienced and leading influencers in the financial realm, trusted by millions to provide advice about money. We handpick the best of the best, so you get advice from real experts. Our goal is to educate and inform, NOT to be a ‘stock-picker’ or ‘market-caller.’ 

Why listen to what we have to say?

While Due does not know how to predict the market in the short-term, our team of experts DOES know how you can make smart financial decisions to plan for retirement in the long-term.

View our expert review board

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More