Legal Definitions - margin stock

Margin stock refers to specific types of securities that investors are permitted to purchase using borrowed money from their brokerage firm. This practice is known as buying on "margin." Not all securities qualify for margin purchases; only those that meet certain regulatory requirements, typically set by financial authorities like the Federal Reserve Board in the United States, are designated as margin stock. These requirements are in place to manage risk for both investors and brokerage firms.

Here are some examples to illustrate what margin stock entails:

• Example 1: Purchasing Shares of a Large Public Company

  An investor, Sarah, believes that "Innovate Pharmaceuticals," a well-established company listed on a major stock exchange, is poised for significant growth. She wants to buy 1,000 shares but only has enough cash for 500. Her broker informs her that shares of Innovate Pharmaceuticals are considered margin stock. This means Sarah can borrow money from her brokerage firm to purchase the additional 500 shares, using her existing investments as collateral. The shares of Innovate Pharmaceuticals qualify because they meet the regulatory standards for liquidity, market capitalization, and exchange listing required for margin eligibility.

• Example 2: Investing in an Exchange-Traded Fund (ETF)

  David wants to gain exposure to the technology sector through an Exchange-Traded Fund (ETF) called "Tech Titans ETF," which tracks a basket of leading technology companies. He has some cash but wants to amplify his investment. His brokerage firm confirms that "Tech Titans ETF" is designated as margin stock. Because the ETF is widely traded on a national exchange and meets other regulatory criteria, David can use his margin account to buy more shares of the ETF than he could with just his available cash, effectively leveraging his investment.

• Example 3: Buying Certain Mutual Funds

  Maria is interested in a specific mutual fund, "Global Growth Fund," which is actively managed and listed on a recognized exchange. She asks her broker if she can purchase shares of this fund on margin. After checking, the broker confirms that "Global Growth Fund" is indeed margin stock because it meets the necessary eligibility criteria, such as being redeemable and having a sufficiently stable market value. This allows Maria to use borrowed funds to increase her position in the mutual fund, subject to the brokerage firm's margin requirements and federal regulations.