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Information > Financial Terms > This page Margin Legally,
a payment on account of a purchase, conferring ownership with its attendant
risks and privileges upon the buyer, but subjecting him to a lien on the
purchase to the extent that credit is advanced to finance the full purchase
price secured by the purchase. Such
margins are dollar margins; e.g., where a customer deposits in a brokerage
account $1,000 on the purchase of 100 shares of a stock at $25 per share,
his dollar margin is $10 per share or ten points.
Equity margins - the type specified by the margin requirements
regulation of the Board of Governors of the Federal Reserve System and
by stock brokers in modern times - are measured not by the amount of cash
deposited on the purchase but by the ratio between the customer's equity
and the current market value of the purchased securities (on which the
lending broker has a lien for the credit extended).
Equity margins may be computed readily by the appended formula:
A
further distinction as to margins is the difference between initial margins
and maintenance margins. Margin
requirements prescribed by the Federal Reserve Board of Governors are
only initial margins (although the board has the power to prescribe maintenance
margins); should the market price of stock bought on margin decline subsequent
to purchase, the account would become restricted, but the board's regulations
do not require the posting of additional equity by the purchaser to restore
the percentage margin to the initial margin.
However, Regulation T of the board of governors does not prevent
a brokerage firm from imposing additional requirements, particularly maintenance
requirements. Rule 431 of
the New York Stock Exchange (NYSE) provides a maintenance margin rule
that must be applied by a broker; and Section 220.7(e) of Regulation T
provides that nothing in the regulation shall prevent brokerage firms
from imposing maintenance requirements. For
the purpose of effecting new securities, transactions and commitments,
the NYSE rule requires that margin shall be at least the greater of the
amount specified in the regulations of the Board of Governors of the Federal
Reserve System or by the above NYSE requirements, or such great amount
as the exchange may from time to time require for specific securities,
with a minimum equity in the account of at least $2,000 except that cash
need not be deposited in excess of the cost of any security purchased.
These minimum equity and purchase provisions shall not apply to
"when distributed" securities in cash accounts and the exercise of rights
to subscribe. In
addition to assigning a current loan value to margin stock generally,
Regulations T and U of the board of governors permit special loan values
for convertible bonds and stock acquired through the exercise of subscription
rights. Margin
requirements of both the Board of Governors of the Federal Reserve System
and the
BIBLIOGRAPHY BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.
Annual Report. |