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The global stock market is worth approximately $80 trillion, with U.S. stock exchanges having a market share of 39%. Among the many types of securities available are Non Marginable securities. About 52% of American adults have invested their money in the stock market.
Keep on reading to learn more.
What Are Non Marginable Securities?
When you invest in the stock exchange, you’ll come across many terms. Here, the focus is on Non marginable securities. They refer to investments that can’t be purchased on margin from financial institutions.
Some examples of such securities include over-the-counter bulletin board stocks. Others are penny stocks and Initial Public Offerings (IPOs).
These stocks are non-marginable by the decree of the Federal Reserve Board. The FRB is an agency of the federal government and works independently. It governs the Federal Reserve System, which is in charge of making monetary policies in the U.S.
It’s also essential to note that securities with prices under $5 may also qualify as Non Marginable securities. The investor’s cash must fund these types of securities 100%. Unfortunately, holdings in this category of stocks don’t add to the buying power of the investor.
Breaking Down Non Marginable Securities
A majority of brokerage firms have a list of the securities they consider Non Marginable. Investors can find the listings online or contact the specific institution for the record. The lists are adjusted frequently to reflect the changes in volatility and share prices.
The main aim of listing Non Marginable securities is to control the costs of administration. They also help mitigate the risk that comes with uncertain cash flows, and volatile stocks. Administration costs tend to increase because of excessive margin calls.
Margin calls are deposit demands made by a broker to an investor. It happens when a margin account falls below the broker’s minimum margin of maintenance. In other words, margin calls occur when an account has decreased below a certain value point.
An investor can respond by depositing more money in the account to bring it to the acceptable minimum value. Alternatively, some of the assets in the account can be sold.
Types of Non Marginable Securities
Here are the types of non-marginable securities you need to know:
Initial Public Offerings
When private corporations want to float their shares to the public for the first time, this is referred to an IPO. Companies seeking to grow their capital usually use IPOs as a way to raise the much-needed cash. Firmly established firms use IPOs as an avenue to allow some owners to exit by selling their shares.
In the IPO process, the company floating the shares brings in investment banks or underwriting firms. Their role is to help determine the best type of security to float, and the number of shares. The firms also help establish the best offering price and time frame for marketing.
Over-the-counter Bulletin Board Stocks
Over-the-counter bulletin board (OTCBB) is an electronic service that offers investors and traders last-minute quotes and prices. The National Association of Securities Dealers provides this trading service.
The service lists stocks that can’t be listed on the major stock exchanges. Such securities are only traded over the counter between individuals on phones and computers. It’s important for investors to note that stocks listed on the OTCBB are not part of major exchanges.
This is how they qualify as Non Marginable securities. OTCBB stocks are generally unstable, and they come with considerable risk, but StockLoan Solutions says it’s possible to mitigate the risk using a stock loan. OTCBB is an essential service because it helps list securities that cannot meet requirements for listing.
Investors should keep in mind that OTCBB is not an actual stock exchange but a platform for securities quotation. The securities are traded by a web of market makers who provide different trades and quotes. The information is available through a secure network only accessible to subscribers.
Penny stocks refer to securities that trade outside the major stock exchanges. They sell at relatively lower prices of less than $5 and have small market capitalization. Penny stocks are highly speculative and high risk because of their small capitalization.
These securities lack liquidity, have a limited following, and are sizeable bid-ask spread stocks. They are among the securities listed on OCTBB.
Over time, penny stocks have evolved from shares that traded for less than a dollar. Currently, the term has been modified to encompass all shares that sell for below $5. However, take note that some large and established companies trade for less than $5.
Companies listed under penny stocks are generally illiquid and highly speculative. They are also subjected to limited listing requirements and fewer regulatory standards. Penny stocks are ideal for investors who have a high tolerance for risk.
Gains in such stocks take long, sometimes years, to materialize.
What Makes Non-Marginable Securities Risky?
Non-marginable stocks are riskier than blue-chip stocks because of several factors. The first factor is that the public lacks factual information to guide them in making informed choices. Information about micro-cap stocks is difficult to find; hence investors can’t make decisions about them.
Stocks listed on OTCBB don’t have to meet the minimum requirements for being listed. This explains why some stocks can quickly move from the central stock exchange, where rules are strict, to OCTBB. Minimum requires usually act as a safety cushion for investors.
Since Non Marginable securities are highly illiquid, there’s a high probability that an investor won’t sell. Low liquidity makes traders manipulate stock prices to the disadvantage of the seller.
Lastly, most of the companies listed in this category are newly formed.
Others are on their way to bankruptcy. Since such companies have poor track records, it becomes challenging to determine the potential of a stock.
Non Marginable securities are types of stocks you can invest in if you have a high tolerance for risk. Since the shares are usually not listed on the main stock exchange, they are highly volatile and risky. You can choose between penny stocks, over-the-counter bulletin board stocks, and IPOs.
If you want to get the most you can from these securities, familiarize yourself as much as you can with them.
You can also read this blog on how to invest in profitable sectors of your stocks.