How do non-marginable securities affect margin trading?
Non-marginable securities can’t be bought with borrowed funds, placing clear limits on leverage and helping traders manage risk more effectively. These restrictions are essential for structuring portfolios and avoiding common pitfalls in leveraged trading.
In this guide, we’ll explore what makes a security non-marginable, how they influence trading accounts, and the strategies investors can use to navigate these limitations while aligning with their financial goals.
What you’ll learn
Defining Non-Marginable Securities
Assets that cannot be bought with borrowed funds in a margin account are called non-marginable securities, and investors must actually use their own capital. Also, many regulators and brokerage firms restrict margin trading (i.e., this limitation) for too risky or volatile securities.
For example, non-marginable securities include newly issued stocks, penny stocks, OTC securities, and bonds. Generally, these assets don’t have the liquidity, stability or financial history to fulfill margin eligibility criteria. For example, newly issued stocks have no proven market presence, and penny stocks are more volatile, making them riskier for margin accounts.
The most important drawback of non-marginable securities is that they do not qualify to be used as collateral to secure a loan. Marginable securities serve as collateral for additional funds, thus increasing an investor’s buying power, in a margin account. Yet this does not extend to non-marginable assets, which means leverage is capped and overall purchasing power is diminished.
These are restrictions that reduce the risk of buying on margin, where you borrow money and can magnify your loss when the asset’s value goes down. By design, brokers and regulators protect investors from being exposed more than they should be in volatile or illiquid markets by declaring certain securities as non-marginable.
Ultimately, non-marginable securities force investors to use all cash to fund purchases. However, this reduces the ability to leverage larger trades and caps potential losses that could arise from borrowed funds. Margin account users need to understand these restrictions to understand proper portfolio management and risk mitigation.
Mechanics of Non-Marginable Securities
Suffice it to say that securities that are not marginable are generally severely restricted, including in how they may be purchased and used. These are securities that require 100% cash payment and cannot be purchased with borrowed funds. Unlike marginable securities, assets that are non-marginable have no way to lever themselves.
Furthermore, non-marginable securities cannot be used as collateral in borrowing. These are assets that don’t count towards the borrowing base of the account and therefore restrict an investor’s purchase power. If there are many non-marginable securities in a portfolio, the investor effectively loses leverage margin for other trades to a large degree.
Non‐marginable securities are frequently liquidity constrained. In general, these are over-the-counter (OTC) stocks, penny stocks, or newly issued shares that tend to be more illiquid and volatile. Because of these characteristics, brokers and regulatory entities impose restrictions on the buying of these stocks on margin to protect the investor and the brokerage from possible quick declines in share value and consequent significant losses if such illiquid assets were bought using borrowed funds.
Short selling is not permitted against non-marginable securities as well. Short selling involves borrowing securities with the idea that they will be sold for more, and then bought back later for less. Because these assets are very risky, brokers usually don’t allow their use in margin-based short selling, limiting the kind of trading strategies you can use.
Essentially, non-marginable securities require full cash payment, reducing borrowing capacity and margin flexibility. Their purpose is to remove the risk from investing, so that investors don’t put too much in volatile markets.
Comparison: Marginable vs. Non-Marginable Securities
Marginable and non-marginable securities are primarily distinguished by the methods of purchase and by the effect these methods have on buying power and on trading strategies. The reason marginable securities can be bought with borrowed funds is that it makes it possible to leverage capital and buy more funds than would have been otherwise. However, non-marginable securities are subject to 100% cash payment obligation and prevent borrowers from borrowing against these assets.
Investors can borrow up to 50 percent of the purchase price on marginable securities to effectively double their buying power. This leverage allows you to take larger positions and make higher profits if trades win. But it also amplifies risk, as losses are multiplied when borrowed funds are involved. Margin calls are triggered when assets decline in value significantly, and investors may have to deposit more money, or sell, to meet the brokerage requirements.
Unlike non-marginable securities, leverage is eliminated. Buying power is limited by purchases only being able to be made with available cash, but there is no risk of margin calls. Penny stocks, over the counter securities or newly issued securities are typically riskier (more volatile and less liquid) assets. Due to their rapid value fluctuations, they are not fit for margin trading.
Marginable securities allow traders to increase market exposure or take advantage of short-term opportunities with a strategic approach. These securities are inherently more speculative, and will appeal to investors who desire to minimize risk, as they require fully funded positions.
The ultimate difference between marginable and non-marginable securities is how they affect buying power, risk exposure and trading strategy flexibility. Leverage and higher returns would be prioritized by investors in marginable securities and reduced risk would be prioritized by others seeking non-marginable securities.
Real-World Examples
Marginable securities are those that meet eligibility criteria for purchase with borrowed funds, unlike non-marginable securities, whereby non-marginable securities include many types of financial instruments that are too volatile or illiquid to be the subject of margin trading.
For example, penny stocks are often not marginable because they are so volatile and thinly traded. Luckin Coffee’s OTC stock (LKNCY) is a notable case of how low-priced shares can collapse when one is involved in a fraud scandal as happened in 2020. Such assets can only be purchased with investors’ own funds.
Newly issued stocks, like IPOs, are another example. After its 2019 IPO, stocks such as Beyond Meat experienced extreme price volatility, with shares rocketing 163% on the first day. In particular, IPO stocks have tended to be non-marginable in the initial trading period, meaning that brokers force customers to buy in full cash, because of their unpredictability.
Junk bonds, or speculative grade bonds, are often non-marginable because of default risk. For instance, we’ve seen high yield WeWork’s 2021 bond offering was cash only, as it is a company in financial distress. Similarly, certain mutual funds, ETFs, and leveraged products with high volatility, such as Direxion Daily Financial Bear 3X Shares, are also non-marginable to protect against rapid value changes.
Because the contracts are nearing expiration or are highly volatile, they are often restricted from margin trading as well. In all cases these assets’ non-marginable status protects both the broker and the investor from catastrophic risk.
All in all, these are a non-marginable securities group, such as penny stocks, IPOs, speculative bonds, volatile funds and some options, since a cash payment is required because of the risk of illiquidity, volatility or regulatory uncertainties of these securities.
Regulatory and Brokerage Guidelines
Regulations and brokerage policies are the keys to whether a security is marginable or not. These guidelines shield investors and brokerage firms from undue risk in the event of volatility or illiquidity that could result in substantial loss. The framework for margin rules is set by two primary entities: The U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and individual brokerage firms.
Regulation T, enforced by FINRA under the Federal Reserve, provides the limit on the credit that brokers can extend to customers. This rule, in turn, allows investors to generally borrow up to 50 percent of the purchase price for marginable securities. Nevertheless, some riskier securities, i.e. penny stocks, newly issued securities or securities traded on over-the-counter (OTC) markets, are excluded due to their volatility and the possibility of sudden price changes.
Most brokerage firms have stricter internal policies and decide which securities to evaluate on factors such as liquidity, volatility and market conditions. They factor market cap and listing status into what makes a margin eligible. For instance, a security may be considered non-marginable if it is thinly traded or has not had a long history of stable performance.
All in all, regulatory authorities and brokerage firms are involved in setting margin rules. These ensure investors don’t take loans and use them excessively and borrowers don’t use loans in volatile or less liquid securities.
Advantages of Non-Marginable Securities
Non-marginable securities offer distinct advantages in risk management and ease of investment strategy. The first advantage is the elimination of financial leverage risk. Since this investment is paid entirely in the investor’s own money, borrowing is not involved and there is no danger of margin calls. When the value of marginable securities falls, investors are told to deposit additional funds or else the broker will sell their investments without their consent. Non-marginable securities protect you from magnified losses from borrowed funds without the risk of overleveraging.
A second advantage is towards a simpler, more conservative investment evaluation. Because fully funding purchases dissuades investors from overextending themselves or taking on high risk investments for leveraged returns. This approach promotes disciplined decision making by pushing investors to consider the intrinsic value of securities rather than prospective gains. Consequently, this strategy promotes a more cautious, risk averse investment strategy, and dampens excessive speculative investment that is spurred by access to margin.
Then, specific non-marginable securities, some conservative bonds, or low-risk mutual funds tend to have less volatility and more stability. For instance, U.S. Treasury and high-grade corporate bonds are non-marginable and tend to attract risk averse investors that consider them low risk assets that offer predictable returns; therefore they are purchased. In addition, the lack of leverage is apt to promote long term investment behavior, diverting investor behavior from short term speculation or trading with great frequency in order to take advantage of market movements.
Rather than taking a more aggressive approach towards managing investments, non-marginable securities are fully funded investments, or investments where one is not leveraged and which allows an investor to take a more measured approach to portfolio sustainability and risk minimization. If you’re looking for a straightforward, low risk strategy to build long term wealth, these securities provide a solid foundation.
Disadvantages of Non-Marginable Securities
There are several drawbacks to non-marginable securities, which can limit the flexibility and strategy of an investor. The reduced liquidity is the real issue. Penny stocks (or newly issued) securities often do not trade in highly liquid markets, which leads to wider bid-ask spreads and therefore makes it more difficult to enter into trade quickly at favorable prices. But during periods of market stress, this challenge becomes more pronounced, and selling these assets without significant price impacts becomes more difficult, increasing the systematic risk associated with these illiquid assets.
This disadvantage is that you do not have access to margin so there is limited purchasing power. These securities are purchased with cash so that the investors can’t leverage their capital to buy bigger positions. This certainly reduces risk, yet it additionally confines chances for those hoping to expand yields through borrowed funds.
Trading non-marginable securities becomes even more complicated due to brokerage imposed restrictions. Assets such as penny stocks or OTC securities are often made less accessible to more speculative or high growth markets due to many firms demanding higher cash deposits, or stricter trade conditions. Additional requirements imposed on these companies are barriers for investors that want to diversify or enter niche market segments.
These are also riskier (assets with high volatility) like penny stocks or speculative bonds and are also non-marginable securities. Their instability is why they’re non-marginable, since margining large losses could result. It may be unattractive for investors interested in leveraging such assets for potential high returns.
In a nutshell, these type of securities can be tricky due to poor liquidity, limited buying power, and selective broker restrictions. For investors seeking to maximize capital usage or speculate, the limitations of non-marginable securities may reduce their appeal. Supplementing strategies with tools like trade alerts can help investors stay informed about market changes and identify opportunities within these restricted assets.
Investment Strategy Considerations
The inclusion of non-marginable securities into an investment strategy has two advantages: diversification and risk management. These securities reduce dependence on leverage, limiting the danger of severe losses from exaggerated market declines and appeal to investors worried with wealth accumulation and hostile to the hazards of margin trading.
The main advantage is portfolio diversification. These investments include securities classed as non-marginable assets, such as certain bonds, newly issued stocks, or conservative mutual funds, which provide stability along with higher risk marginable investments. For example, adding non-marginable bonds to a portfolio can reduce overall volatility, particularly when the mix includes more volatile equities, and provide a steady income stream. It diversifies risk across asset classes, making it less likely that the return of a single security will have a large impact.
They also improve risk management through non-marginable securities. These assets eliminate over leveraging, as they demand full cash payment and hence do not expose anyone to margin calls. Non-marginable securities are a safeguard, which can be used in volatile markets to avoid the necessity to liquidate securities at unfavorable prices. That stability relieves financial and emotional stress of trading hyper leveraged positions.
Also, these securities are perfectly suited to conservative, or income oriented strategies. For investors who look for regular returns with little risk, non-marginable assets like dividend yielding shares or stable bonds can work for them. Marginable securities tend to be more speculative and have more predictable outcomes less prone to the sharp price swings associated with speculative marginable investments.
Including non-marginable securities in a portfolio can help balance, increase diversification and even assist in a more disciplined way for managing risk, yet for the investors placing stability higher than aggressive growth.
Market Impact of Non-Marginable Securities
Market dynamics where liquidity and price stability are reduced through the presence of non‐marginable securities is affected. Without borrowed funds, trading volumes are smaller, especially for stocks at the lower end of the market such as penny stocks, OTC shares, and newly issued stocks, which are viewed to be too high risk to allow margin trading. Because lower participation leads to wider bid ask spreads, it is harder for investors to trade without moving the price.
But these securities often have a higher price volatility. Because these assets are thinly traded, even modest trades can potentially create a significant price swing; and with fewer buyers and sellers, this is true especially in penny stocks. For example, a small buy or sell can cause large price changes that are more determined by short term sentiment than by the underlying fundamentals. In general, the price is volatile enough that these securities are attractive to speculative traders, which continues to compound the volatility.
Yet, such securities can provide positive influence on the stability of the broader market by reducing leverage. With margin as an option, investors are more likely to have some breathing room during market downturns without fearing forced liquidations, thus lowering downside risk. But it decreases the chance of cascading sell-offs caused when margin calls force the selling that drives demand even lower. This limitation, in periods of market stress, helps limit systemic risks and stabilize the overall market.
Non-marginable securities in summary increase the impact on liquidity and volatility by reducing both trading volumes and increasing price volatility. Yet, because they are prohibited from margin trading, this limits the possibility for margin-related sell-offs and stabilizes when the broader market is under stress.
Conclusion
Investors have the opportunity to participate in some asset classes without the risks associated with leverage via non-marginable securities. Because these securities can’t be bought with borrowed money, they encourage a conservative mindset; investors have to invest their own capital. This encourages responsible risk-taking and minimizes the chance for magnified leveraged losses.
Non-marginable securities limit liquidity and do not lend themselves to margin-based buying power, but they can provide increased portfolio stability during market volatility. They also help protect against excessive exposure to risky assets such as penny stocks and new-issue securities.
The flexibility and returns potential of marginable assets are missing in non-marginable securities, however, the non-marginable securities offer a safe option for investors looking to invest for the long term and do plenty of prudent financial management. By understanding the role of these investors you are able to match your portfolio to your risk tolerance and goals.
Understand Non-Marginable Securities: FAQs
What Criteria Make a Security Non-marginable?
Due to variables of volatility, liquidity and regulatory status, securities are considered non-marginable. The most common reasons for not being eligible for trading at all, or only being eligible for trading on their over-the-counter (OTC) markets, are that they are newly issued or lack long trading history, or are a penny stock. Securities are classified by FINRA or brokerages as non-marginable if they are judged too risky for margin trading.
Can I Trade Non-marginable Securities in a Standard Brokerage Account?
You can trade non-marginable securities in a standard brokerage account but you have to fund such purchases with your own money. Non-marginable securities cannot be bought on borrowed funds, and enough cash must be available to settle the full cost.
How Do Brokerage Firms Classify Securities as Non-marginable?
Brokerages classify Securities as Non‐marginable, generally based on internal risk assessment and regulatory guidelines. Securities on this category include those that have low trading volume, high volatility, or newly issued because they are not suitable for leveraged trading.
What Impact Does Non-marginable Status Have On Trading During Volatile Market Conditions?
Non-marginable securities don’t add anything but risk, since they’re bought with cash and thus eliminate the risk of margin calls during volatility and forced liquidations. But in turbulent markets, trading them fast or at good prices can be difficult because of their own lower liquidity and volatility.
Are There Any Particular Types of Non-marginable Securities That Are Recommended for Conservative Investors?
Non-marginable securities, such as investment grade bonds, stable dividend paying stocks or low risk mutual funds, might be preferred by conservative investors. These options have lower risk and consistent returns, which support strategies based on capital preservation and regular income.
