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Margin — Frequently Asked Questions

How can an investor mitigate some of the risk in margin trading?

Purchasing or borrowing against securities on margin always carries a degree of risk.  You can help manage that risk by:

  • Limiting your use of leverage by not using your entire margin availability or buying power
  • Diversifying your investment portfolio
  • Borrowing against less volatile securities

You should monitor the market and your investments against your risk tolerance and target goals.

Diversification does not ensure a profit or protect against loss in declining markets.

What is a margin call or maintenance call or Regulation T call?

This is a generic term that refers to both maintenance calls and Regulation T calls (also referred to as Reg T or Fed calls). When the securities in your margin account decline in value, the equity in your margin account declines. Equity is defined by the market value less the outstanding balance. Firms require a certain amount of equity to be maintained. If the value of the securities declines enough, your brokerage firm may issue a margin call to reach the required equity.

An investor who receives a margin call is required to deposit additional funds or securities in a margin account because the equity in the account doesn’t meet the brokerage firm’s established minimum equity requirement (maintenance call or “house margin”). This could be due to changes in the market value of the margined securities, or because additional securities have been purchased or sold short in your margin account. If a call is not met a timely manner, your securities may be liquidated to meet the call and potentially create excess equity. In falling equity markets, your securities may be liquidated prior to the due date to prevent a negative equity position.

Wells Fargo Advisors also reserves the right to increase maintenance requirements, which could trigger a call. Please realize that you may not get an extension of time to meet a call, and the firm is not required to contact you before selling your securities to meet a call.

How do you avoid a margin call?

As a margin user, you need to thoroughly understand the risks associated with using this kind of leverage in your brokerage account, especially when you borrow at or near the initial margin limit.

  • Give yourself a buffer. Allow for excess equity in your account.
  • Monitor your account. If you notice the value of stocks in your margin account are declining, deposit additional funds or collateral.
  • Be prepared for margin calls. Keep a reserve of funds available outside your brokerage account so that you can quickly meet a margin call.

What is a Special Memorandum Account (SMA)?

The Federal Reserve authorizes this special account to preserve buying power in your margin account. It reflects any excess equity in your margin account that is above the required amount (50% for marginable securities). If the value of securities declines, this availability will continue to be preserved causing it to be elevated relative to the reduced market value.

What are margin eligible securities?

Most securities are eligible to be used as collateral including most equities, other than low priced or thinly traded stocks, most mutual funds, if you’ve held the mutual funds for a minimum of 30 days, and most investment grade fixed income securities (municipal, corporate, government agency or Treasury bonds).

What securities are not margin eligible?

Some assets are not available to use as collateral for margin borrowing, including money market mutual funds, precious metals, annuities, and offshore mutual funds.

Can margin trading be used in my qualified retirement accounts?

No. Because of the inherent risks in margining securities and regulatory prohibitions against doing so, margin is not permitted in retirement accounts.

Can margin trading be used in managed accounts?

No. Most managed programs do not permit margin loans based on the managed strategy.

Can margin loan proceeds only be used for investment purposes?

No, when appropriate, margin proceeds can be used for a variety of funding needs for personal and business use, as well as investment opportunities.

Why set up a margin account with Wells Fargo Advisors?

  • Competitive interest rates
  • 24/7 Online access to information: margin loan balance, margin buying power, funds available to withdraw, and margin activity information
  • Convenient margin trading: place trades online, through our automated telephone system or speak with one of our investment professionals
  • Easy withdrawal of funds, including online transfers between linked brokerage and Wells Fargo bank accounts.  You can also use margin loans against securities held in your brokerage account for a wide variety of business or personal needs.