Margin accounts cannot be allowed to become "concentrated" in any particular security or securities to a degree where a sudden sharp adverse price change of that security could wipe out the customer's equity and put the brokerage firm at risk of loss. Put another way, brokerage firms are much more comfortable carrying margin accounts with many diversified positions, and by restricting concentrated accounts they encourage diversification. While every brokerage firm has slightly different rules, the following example is typical of brokerage "house rules" regarding concentration.

A concentrated account is defined as follows:

1. Any margin account containing a long security which, if valued at zero, would create a deficit equity position; or


2. A margin account containing a short position, that if valued at double the current price would create a deficit equity position; or


3. A margin account containing a position which is greater than 50% of daily volume in the security in question.


4. Additionally, no account may purchase or hold more than 1 3/4% of the outstanding shares of any security on margin.


5. All firm accounts collectively may not purchase or hold more than 7 1/2% of the outstanding shares of any security on margin.

Margin purchases may not be made for accounts held under the Uniform Gifts (or Transfers) to minors accounts UGMA/UTMA. Most accounts that are estate accounts (all parties deceased) are restricted from placing new margin transactions. Fiduciary accounts are also barred, unless there is specific authorization to engage in such trading.

Only certain securities may be purchased on margin. Securities that are marginable under Section 220.17 of Regulation T are defined as:

1. Any "listed" securities, i.e., those traded on a national securities exchange,
2. Any over the counter security designated as a National Market System (NMS) security,
3. Securities traded over the counter and on the Federal Reserve List of Marginable OTC Stocks and List of Foreign Margin Stocks.

The SEC has ruled that credit cannot be extended by a member of the original selling group of brokers on a new issue until 30 days after the selling syndicate has closed. The purpose of this ruling is to prevent underwriting brokerage firms from being tempted to push more of a new issue that is selling poorly onto clients by placing them in a margin account. Thus, brokers cannot allow customers to buy or otherwise finance new issues on margin.

The same rule applied to closed-end investment companies (commonly known as closed-end mutual funds--the ones usually traded on an exchange). Thirty days after the syndicate has closed, they are eligible for margin as long as they are either listed on a national exchange or listed on the Federal Reserve List of Marginable OTC Stocks.

Mutual funds purchased directly from the fund itself are considered by the SEC to be a continuing new issue. As such, if they were otherwise qualified, a customer could borrow 50% against the securities once they have been held for 30 days. However, if the customer purchases the mutual fund shares somewhere other than the fund distributor (i.e.: from a broker) the shares are immediately eligible for margin and credit extension.

Margin account debit balances (the amount of funds loaned to the account) are charged interest daily based on the broker call rate, which is the rate that the banks charge brokerage firms for money. The broker call rate is listed daily in major financial newspapers. The interest rate that brokers typically charge run from 1/2% to 2 1/2% over the broker call rate. The larger your account is, the lower the rate of interest charged is likely to be.

The interest that you pay on your margin account is tax-deductible to the extent that it is offset by investment income (dividends, interest earned and capital gains). In other words, in order to deduct $1,200 in margin interest charges in a year, you must report at least $2,000 in investment income.

You may use your margin account to borrow from your broker for purposes other than buying stocks and bonds. The interest rates charged on margin accounts are almost always lower than a consumer bank loan, funding is quicker, and there are no scheduled monthly payments or penalties for pre-payment.