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
- Investopedia
- Financial Industry Regulatory Authority (FINRA)
- Fidelity Investments
- U.S. Securities and Exchange Commission (SEC)
