Margin Loan Availability What it Means How it Works
Margin Loan Availability: What it Means, How it Works
What is Margin Loan Availability?
Margin loan availability describes the amount in a margin account currently available for purchasing securities on margin or for withdrawal. A margin account makes loans available to the customer of a brokerage firm using the customer’s securities as collateral.
How Margin Loan Availability Works
Margin loan availability tells a brokerage customer the amount of money in their margin account available for purchasing securities on margin or for withdrawal. As the value of securities in the account rises and falls, the amount of money available for loan also changes since the securities serve as collateral for the loan. If the value of securities drops, so does margin loan availability.
Margin loan availability can be used in a couple of specific contexts:
1. To show the dollar amount in an existing margin account available for purchasing securities. For new accounts, this represents the percentage of the current balance available for future margin purchases.
2. To show the dollar amount available for withdrawal from an account with existing marginable positions used as collateral.
Margin loan availability changes daily as the value of margin debt (including purchased securities) changes. However, it may not reflect pending trades occurring between the trade date and the settlement date.
Brokerage firms impose a maintenance requirement on margin accounts, which is a percentage of the total market value of securities purchased on margin. If the margin loan availability falls below the maintenance margin, the investor may receive a margin call, which is a formal request to sell securities or deposit additional cash into the account within three days. The Federal Reserve Board, self-regulatory organizations (SROs) like the Financial Industry Regulatory Authority (FINRA), and securities exchanges have rules governing margin trading, but brokerage firms can also set more restrictive requirements.
Margin loan availability rises and falls with the value of securities in an investor’s margin account. If the account’s equity drops too low, the investor may face a margin call and have to sell securities to cover the shortfall.
Example of Margin Loan Availability
Let’s say Bert M. is a client at Ernie’s Brokerage Firm. Bert has a margin account with securities held as collateral. These securities serve as collateral for any money Bert borrows to buy securities or withdrawal from the account.
The money borrowed from Ernie’s firm for additional securities or a withdrawal is called a margin loan. The available amount Bert can take at any given time is called the margin loan availability and is based on the current value of his pledged securities.