Legal Definitions - marginable security

A marginable security is an investment asset, such as a stock, bond, or exchange-traded fund, that an investor can purchase by borrowing money from a brokerage firm. When an investor buys a security "on margin," they pay only a portion of the purchase price themselves, and the brokerage firm lends them the remaining amount. Only certain types of securities are eligible for this kind of loan. These are typically assets that are stable, highly liquid (meaning they can be easily bought or sold without significantly affecting their price), and meet specific regulatory requirements set by authorities like the Federal Reserve and the Financial Industry Regulatory Authority (FINRA). These criteria ensure that the security can be readily sold by the brokerage firm if the investor fails to repay the loan, thereby protecting the firm's interests.

• Example 1: Common Stock of a Large, Established Company

  Imagine an investor wants to buy shares of Microsoft Corporation (MSFT). Microsoft is a globally recognized company with a long history of stable performance, and its stock is actively traded on a major stock exchange. Because of its high liquidity and market stability, Microsoft stock is considered a marginable security. This means a brokerage firm would allow an investor to purchase these shares using a loan, with the shares themselves acting as collateral for the borrowed funds.

• Example 2: U.S. Treasury Bills or Bonds

  Consider an institutional investor looking to acquire a substantial amount of U.S. Treasury bonds. These government-issued securities are widely regarded as among the safest and most liquid investments in the world. Due to their extremely low risk profile and deep market, U.S. Treasury bonds are classified as marginable securities. This allows the investor to use a loan from their broker to purchase these bonds, leveraging their investment while the bonds serve as secure collateral.

• Example 3: Shares of a Popular Exchange-Traded Fund (ETF)

  Suppose an individual investor wishes to invest in an ETF that tracks a major market index, such as the Vanguard S&P 500 ETF (VOO). This ETF holds a diversified portfolio of stocks from the largest U.S. companies, is highly liquid, and is actively traded on stock exchanges. Because of its broad market acceptance, liquidity, and regulatory compliance, VOO is designated as a marginable security. This enables the investor to buy shares of the ETF by borrowing a portion of the purchase price from their brokerage firm.