Non-Marginable Securities
Candlefocus EditorMost major stocks, ETFs, and mutual funds listed on the NYSE or NASDAQ can be bought on margin, and require only 50% of the principal amount needed to purchase the security. This borrowed money is known as leverage, and many experienced traders utilize leverage to enhance their gains.
Non-marginable securities, on the other hand, must be funded with cash alone, as they are seen as too risky to be leveraged. These include recent IPO stocks (those that have gone public within the last 30 days), penny-stocks (those that trade for under $5 per share), and Over-the-Counter Bulletin Board (OTCBB) stocks, which are companies that are not listed on a major stock exchange and can be more volatile.
The reason that brokers and financial institutions place restrictions on marginable securities is to reduce risk and protect their customers from making unwise investments that can lead to financial loss. Taking on too much leverage through margin purchases can cause a margin call, which is when a broker takes a portion of the investor's securities to satisfy the debt acquired from the loan taken out to purchase the security. This can be a severe financial blow for the investor, and it is far easier to avoid this for securities that are non-marginable.
Non-marginable securities should be thoroughly researched and understood by the investor before purchase, as they often come with high-risks. Most investors should stick to marginable securities that are more stable and liquid, as they offer more opportunity for greater returns if traded wisely.