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Introduction to Marginal Account

Margin Account 
A brokerage account that allows investors to buy securities by borrowing a portion of the purchase price.  Margin accounts are governed by the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and the lending brokerage firm.

There are two ways to purchase stocks:

a) Tthe buyer can pay the purchase price in full

b) Using a margin account. In a margin account purchase, the buyer pays a portion of the purchase price and the broker lends the difference. The buyer in turn pays interest on the broker's loan in addition to the usual commission fees. For collateral, the broker holds onto the stocks. Dividends earned from the stocks are used to help offset the interest payments.

Margin is determined by the following equation:

It looks complicated, but it isn't. Here's an explanation:

M is the margin, V is the market value of the securities, and L is the broker's loan. The ratio is expressed as a percentage. The lowest initial margin, or the margin at the time of the purchase, is 50% (as set by the Federal Reserve Board). After the purchase of the stock on margin, there is a maintenance margin below which the margin is not allowed to fall. On the New York Stock Exchange, the maintenance margin is 25%, but brokers can set their own margins (30% is common). If the margin falls below the maintenance margin, the broker calls for additional cash from the investor. If the money does not come within the specified time, the broker immediately sells the stock.

Buying on margin is a technique that many investors use. It allows better utilization of available resources. But as the investor, you must be completely aware and positive about buying before you actually do so.

When you trade on margin, you can gain buying power by borrowing a major portion of the investment amount.  

Placing Orders
Before placing an order on margin, make certain that the security is marginable and that you are able to fulfill the margin requirements. Remember to tell the trader that the order should be placed in your margin account.

Settling Margin Transactions
All margin transactions are settled through your money market settlement account. Margin account credits will sweep to your money market account, and funds will be drawn from that account to reduce margin account debits. This could affect your investment strategy and your ability to write checks against your money market account.

If you prefer, your account can usually be structured so that margin balances do not sweep automatically. In this case, we will move only enough funds from your money market settlement account to establish and maintain the required margin equity.

The Federal Reserve Board regulates the amount you can borrow. Currently, this rate is 50% of the purchase price of eligible securities selling at $10 per share or more. You must maintain a minimum equity of $2,000 in your margin account. Pershing® offers a competitive rate of interest based on the current Pershing base lending rate. Interest is charged on the settlement date.

Daily Adjusted Debit Balance

Selected Interest Rate Above the Pershing Base Lending Rate

$.01 to $19,999.99 1.25%
$20,000 to $49,999.99 0.75%
$50,000 to $99,999.99 0.50%
$100,000 and over 0.25%

Note: Options are not marginable and require 100% payment in advance.

Margin Requirements
Purchases Initial Requirement Maintenance Requirement
Equity securities 50% More than $10: 30% call to 35%

$3 to $10: $3 per share

Less than $3: 100%
Corporate, corporate zero-coupon, and convertible bonds 50% Greater of 30% of market value or 20% of principal amount
Municipal bonds 30% 25%
Municipal zero-coupon bonds 30% Greater of 25% of market value or 20% of principal amount
U.S. government bonds with more than one year to maturity 25% 20%
U.S. government bonds with less than one year to maturity 10% 6%

Sales Initial Requirement Maintenance Requirement
Short sales 50% $17 and over: 30% call to 35%

$5 to $16.875: $5 per share

Less than $5: greater of 100% or $3 per share
Short versus the box 10% 10%

Note: All securities must meet criteria determined by our clearing firm before they can be margined. When you have a concentrated position, maintenance requirements might be higher.

If you initiate a short sale on margin but the stock is not available to borrow, your account will be subject to a mandatory "buy in" for all or part of your short position.

Margin Calls
In the event of a recent purchase or market fluctuation, there may be additional equity required in your margin account.

Usually a check or securities must be recieved by the due date noted in the margin call letter. If the margin call is not met by the due date, securities could be liquidated from your account to meet call requirements.

Recommended further reading:
Margin: Borrowing money to pay for stocks
What is a Margin Account?
About Margin calls
Buying Power and Excess Margin
The advantages and disadvantages of a Margin Account