A margin account permits investors to borrow funds from their brokerage firm to purchase marginable securities on credit and to borrow against marginable securities already in the account. If you're interested in applying please see How do I apply for margin trading.
The Federal Reserve determines which stocks can be used as collateral for margin loans. However, TD Ameritrade is not obligated to extend margin on all approved stocks.
The Federal Reserve Board (FRB) sets margin requirements for various marginable securities. For instance, the current margin requirement for initial purchase of eligible securities is 50% of the purchase amount. This is commonly referred to as the Regulation T (Reg T) requirement. Under Reg T, you must have at least 50% of the value of the trade in your account in either cash or fully paid marginable securities by settlement date of the trade.
For example: You open a margin account with $5,000 in cash. Regulation T states we may extend you an additional $5,000 for purchases or to sell short. Your stock buying power to purchase marginable securities is $10,000.
Margin accounts are also subject to minimum maintenance requirements.
Margin and options trading pose additional investment risks and may not be suitable for all investors. In addition, certain account types may not be eligible for margin, options, or advanced options trading privileges. Market volatility and volume may delay system access and trade executions.
IMPORTANT FACTS ABOUT MARGIN ACCOUNTS
Please understand the following important facts about margin accounts:
You can lose more than your initial investment in a margin account.
If the securities you hold in a margin account decline in value, you may have to deposit additional funds to maintain the necessary equity according to the firm's requirements. With dramatic changes in price, this means that your entire investment can be wiped out, and you will still be required to repay the full amount of your loan, plus all accrued interest.
Firms have the right to force you to liquidate positions in a margin account.
If the equity in your margin account declines below the minimum equity requirement, the brokerage firm can force you to liquidate positions in your margin account.
Firms can liquidate securities in your margin account without prior notice
A brokerage firm is not required by law or regulation to give an investor prior notice about a requirement to deposit additional funds or equity. Many investors believe they are entitled to a certain period to meet a call for equity, but that is not the case. In practice, most brokerage firms will provide a standard time period to meet a call, but that time period can be accelerated entirely at the firm's discretion, and the firm can decide to liquidate at any time.
You may not have control over what securities are liquidated
Because a firm may choose to liquidate securities in a margin account at any time, and without prior notice, you may lose the ability to decide which securities are to be liquidated.
Margin maintenance requirements can be changed without prior notice
The margin maintenance requirements for securities are broadly defined by regulators, but specific securities, or groups of securities, can be held to higher requirements at the discretion of the brokerage firm. Moreover, firms have the right to change these requirements at any time, and without prior notice. Such a change can result in an immediate margin call. Be sure to check with your brokerage firm to determine if a particular security has a higher requirement.
Firms are not required to grant additional time to meet margin calls
When a margin call is issued, you may not be entitled to an extension of time to meet the call. This means that overnight delivery or wiring funds are often the only courses of action an investor can take to meet a margin call, short of liquidating positions. Informing the brokerage firm that a check is in the mail, or that a deposit will be made on a certain date, may not be a sufficient reason for a firm to delay a margin liquidation.
These facts underscore the need for investors to take responsibility for understanding all of the practices and calculations underlying a margin account. The financial risk of a securities investment is magnified by the use of margin, and staying aware of the current status of a margin account is absolutely necessary to help control that risk.
For a more detailed explanation of margin trading, please read the Margin Account Handbook.
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