Introduction to margin accounts

Margin

Margin is the use of borrowed money to leverage an investment. This can be used in long positions, when the client wants to borrow money to buy more securities than the money in their account would allow. Margin is also the only place investors can short securities - to borrow securities and sell them short, that must be done in a margin account.

Margin account documentation

The margin account documentation has several named parts you need to understand and keep apart.

Credit agreement

With margin accounts, the investor is borrowing money. With all extensions of credit when it comes to loaning/borrowing money, there is a credit agreement. This is a required document in the margin packet, and would explain the interest rates, and parts of the process like that.

Hypothecation agreement

Hypothecation is the investor pledging their securities to the broker dealer as collateral for the loan in the margin. If the investor doesn’t meet the required margin or maintenance calls, this is what allows the broker dealer to sell the securities to make the required calls. This is a required document in the margin packet.

Loan consent agreement

Short selling - selling borrowed securities now, hoping to buy them back later at a lower price - can only be done in a margin account, since the shares being sold must first be borrowed. The loan consent agreement is what authorizes the broker-dealer to lend out the securities in your margin account, for example to another customer who needs to borrow shares to sell short. Signing it does not automatically entitle you to the interest the firm earns from that lending. Unlike the other documents, loan consent is optional - you do not have to sign it.

Margin disclosure document

There are additional disclosures required in margin accounts, that must be made when the account is opened and annually thereafter. Included in the disclosures would be:

• The investor can lose more money than they initially invested.
• The firm has the right to force sale of securities in the account, against requests of the client.
• The firm is allowed to sell securities without consulting the investor.
• The firm may change its house margin requirements, at any time, with no advanced notice/warning.
• Investors are not entitled to an extension of time on a margin call.
• Investors are not entitled to choose which securities are liquidated or sold to meet a margin call.

Margin account agreement

The margin account agreement is the umbrella document that combines the margin documents above: the credit and hypothecation agreements, and the loan consent agreement if the customer signs one.

Rehypothecation and the 140% limit

A firm can fund its margin loans by borrowing from a bank and pledging its customers’ margin securities as collateral. Pledging the securities a second time like this is rehypothecation, and SEC rules limit it.

• The firm may pledge securities worth up to 140% of the customer’s debit balance, the amount the customer owes the firm. Any securities above that level are excess margin securities. The firm must keep them, like fully paid securities, in its possession or control and free of liens (SEA Rule 15c3-3).
• The firm can’t pledge customers’ securities for more than its customers owe it in total, and can’t pool one customer’s securities with another’s under a pledge without each customer’s written consent (SEA Rules 8c-1 and 15c2-1).

The bank’s side of the loan falls under the Federal Reserve’s Regulation U, which lets a bank lend against customers’ securities only as far as SEC rules let the firm pledge them.

Example: The 140% limit

A margin account holds $80,000 of stock and has a $30,000 debit balance. The firm may pledge $140\%\times \$30,000=\$42,000$ of the stock. The remaining $38,000 is excess margin securities and stays in the firm’s possession or control.

Regulation T

Reg-T is controlled by the Federal Reserve Board, and was given to them with the Securities Exchange Act of 1934. It functions in 2 primary areas when it comes to borrowing money with securities.

• It sets the date payment, when payment is due for the purchase of securities. Investors have 2 days after the settlement date in order to pay.
• It sets the amount and method credit can be given for use in margin accounts.

The 2-day extension to pay, is pretty easy to understand. It can be thought of as either 2 days after settlement, RegT=S+2, or 3 days after the trade date, RegT=T+3, as settlement is 1 day after the trade date, S=T+1.

If the debt is not paid within those 3 days, the firm (not the customer) can apply to its examining authority, usually FINRA, for an extension, but do not expect one. If it still is not paid, in a margin account the firm must liquidate securities to meet the call. The 90-day freeze is a cash account rule: if a security is sold before it has been paid for in full, and full payment doesn’t arrive within the payment period (or the sale proceeds are withdrawn before it does), the account will be frozen for 90 days. An account that has been frozen, means all payments must be made in full, before any transactions can be made. Once unfrozen, the 3 day normal payment window will be allowed again.

The credit dealing with margin accounts, gets a bit more complicated. For cash accounts, that number is 0%, 100% of a cash account must be deposited in cash, no borrowing allowed. In margin accounts, 50% is the current Reg=T amount that can be extended on credit for margin. 50% is the current Reg=T margin requirement, and initial deposit, for both long and short margin accounts.

Margin calls and maintenance calls

Margin trading carries more risk than a cash purchase, because losses are magnified by the borrowed money. Suppose you buy $10,000 of stock, using $5,000 of your own cash and $5,000 borrowed from the firm. If the stock’s market value drops to $6,000, your equity is now $6,000 − $5,000 = $1,000. Dividing equity by market value gives $\frac{\$1,000}{\$6,000}\approx 16.7\%$, which is below the 25% long maintenance minimum - triggering a maintenance call for enough cash to bring equity back up to that level.

The initial deposit that is required is called the margin call. Margin call, as set by Reg-T, controlled by the Federal Reserve Board, is currently 50%, meaning if you wanted to go long or short, you would need at least a 50% down payment. FINRA Rule 4210 also requires at least $2,000 of equity in a margin account; for a purchase, the customer never has to deposit more than the cost of the securities, but a short sale always needs at least $2,000.

The additional collateral calls, which might be required if the equity in the account falls too low, is called the maintenance call. Maintenance call, set by FINRA Rule 4210 rather than Reg-T, is 25% for long margin accounts and 30% for short margin accounts (for a short stock priced at $5 or more, the requirement is actually the greater of 30% or $5 per share, and below $5 it is the greater of 100% or $2.50 per share). If the equity falls below that level, additional collateral is required, and that will be done by the firm sending out a maintenance call. Failing to meet that maintenance call, would then have the firm liquidate the position. If liquidation is required, the account holder doesn’t have any say, it is the company’s choice on what gets liquidated to meet the maintenance call. FINRA gives the firm up to 15 business days to collect a maintenance call, and can grant the firm more time, but none of that time belongs to the customer: the firm can sell at once, without notice (FINRA Rules 4210 and 2264). This is a separate call from the Reg T call on a new purchase described above, though either one, left unmet, ends with the firm selling securities.

Margin call vs. maintenance call: the margin call is set by Regulation T (Federal Reserve Board) at 50%; the maintenance call is set by FINRA Rule 4210 at 25% for long accounts and 30% for short accounts.

Each firm can set its own house margin requirements. Those can be any number, provided they are higher. House maintenance requirements cannot be lower than the FINRA Rule 4210 maintenance requirements, and house initial requirements cannot be lower than the Reg-T requirement. Firms can change their house margin requirements, at anytime, with no advanced notice needed.

The detailed calculations are taught in Basic margin math. To check an account against the 25% or 30% minimum, divide the equity by the market value: LMV for a long account, SMV for a short account.

SMA, portfolio margining, and day trading

Definitions

Special memorandum account (SMA)

A line of credit that records equity in excess of the Reg T requirement, which the investor can withdraw as a loan or use to buy more securities on margin without depositing additional equity. At the 50% Reg T rate, each $1 of SMA gives $2 of buying power.

Portfolio margining

A risk-based alternative to Reg T’s flat 50% rate, which sets margin requirements from the net risk of an entire portfolio rather than a fixed percentage per position.

Intraday margin

Under FINRA Rule 4210’s intraday margin standard (effective June 4, 2026), a customer who day trades in a margin account must maintain equity commensurate with their market exposure at any point during the trading day, and must promptly satisfy any intraday margin deficit. It replaced the pattern day trader designation and its $25,000 minimum equity requirement; firms that need more time may phase it in until October 20, 2027.

Marginable securities

Marginable securities are those securities that can be traded on margin. There are securities that are marginable and can be bought and sold on margin, and there are non-marginable securities, which can be bought and sold in a margin account but cannot be bought and sold on margin. Non-marginable securities must be 100% purchased in cash.

Marginable securities would include listed stocks, listed bonds, ETFs, and similar types of investments. There is a full list, which is very long, but most exchange-listed securities are marginable.

Non-marginable securities would include most options (though long listed options with more than 9 months to expiration can be purchased on margin), penny stocks, OTC stocks, and recent IPOs. You must hold the IPO shares at least 30 days before they would be considered marginable, and they would, of course, have to follow the other rules. If the IPO was for penny stocks or OTC stocks, they would not be marginable.

Mutual funds cannot be purchased on margin, but can be deposited in the account, if fully held for 30 days, to meet maintenance and margin calls.