Legal Definitions - margined security

A margined security refers to a financial asset, such as a stock, bond, or exchange-traded fund (ETF), that an investor purchases partly with their own money and partly with funds borrowed from their brokerage firm. In this arrangement, the purchased security itself serves as collateral for the loan provided by the broker. This practice, known as buying on margin, allows investors to increase their potential returns by controlling a larger position than their cash would otherwise permit, but it also significantly amplifies their potential losses and risks.

• Individual Stock Purchase

  Scenario: Sarah believes Company X's stock will rise significantly. She has $10,000 in her brokerage account but wants to buy $20,000 worth of Company X shares. Her broker offers her a margin loan for the additional $10,000.

  Explanation: The shares of Company X that Sarah purchases are the margined securities. She used her own $10,000 and borrowed another $10,000 from her broker, with the purchased shares acting as collateral for that loan. This allows her to double her exposure to Company X's potential growth, but also doubles her risk if the stock price falls.

• ETF Investment by a Fund Manager

  Scenario: A small investment fund manager, Mark, wants to take a leveraged position in a broad market index through an Exchange-Traded Fund (ETF) that tracks the S&P 500. He uses a margin account to purchase $500,000 worth of this ETF, even though his fund only has $250,000 in available cash for this particular trade.

  Explanation: The S&P 500 ETF units purchased by Mark are the margined securities. The brokerage firm provided a loan for half of the purchase price, using the ETF units themselves as security against that loan. This strategy aims to magnify the fund's returns if the market rises, but also exposes the fund to greater losses if the market declines.

• Corporate Bond Acquisition

  Scenario: A sophisticated investor, David, identifies a promising set of corporate bonds from a stable company that he expects to appreciate in value. To maximize his potential profit, he uses his margin account to acquire $150,000 worth of these bonds, contributing $75,000 of his own capital and borrowing the remaining $75,000 from his broker.

  Explanation: In this instance, the corporate bonds David purchased are the margined securities. He leveraged his investment by borrowing a portion of the purchase price from his brokerage, with the bonds themselves serving as collateral for the loan. This allows him to control a larger quantity of bonds than his cash alone would permit, amplifying both potential gains and potential losses.