What is the minimum amount of stocks or money one can have in an account to be able to buy on margin?

Some investors choose to double their buying power in the stock market through a process known as buying on margin. Buying stocks on margin allows investors to pay for a fraction of the stock (usually around 50%, but it cannot exceed this), and then borrow the rest from their broker. There are certain rules and requirements in place to keep margin accounts under control.

A margin account works something like this - if you plan on buying stocks on margin, your broker will set you up with a margin account. Let's say you put $5,000 in it. That gives you $10,000 of buying power, since you can borrow up to 50%. If you decided to spend $4,000 on a certain stock, that would leave you with $6,000 worth of buying power - $1,000 in cash and $5,000 in your margin account (excluding commissions).

Buying stocks on margin seems like an attractive option as it can result in a large return when the stock goes up. It gives you leverage by allowing you to purchase more stocks by using your assets you already have as collateral for the loan, and it also lets you to react quickly to new investment opportunities because you have the added money in your account.

But like anything related to the stock market, there are risks. If the stock plummets, you could end up owing more than your initial investment. If it falls below 75% of its original value, the broker will issue what is referred to as a margin call since the investor must have a certain percentage of equity in his account at all times.

Requirements for Buying on Margin

These risks are greatly reduced thanks to a number of regulations in place by the Federal Reserve. First of all, certain stocks can't be bought on margin. For example, any stock that is less than $5 a share (also called penny or micro-cap stocks) cannot be purchased on margin. In addition, IPOs (Initial Public Offerings, or companies that have recently gone public) also can't be purchased on margin until they've been on the market a certain amount of time.

Another important thing to keep in mind is that there is a minimum amount of stocks or money that must be in your margin account at all times. This is called the minimum margin. The NYSE and NASD broth require investors to keep a minimum of $2000 in their margin account. Keep in mind that this is cash equity and does not include $2000 in stocks. It is also just a minimum; a broker can require more at his discretion. Brokers will not be able to open a margin account without at least that amount in equity.

In addition to the minimum margin, there is also a maintenance margin, which states you must maintain equity of at least 25%. If not, your broker will issue a margin call. A margin call means the investor much put more money into the account. If he can't do this, however, he'll have to sell the stock, pay the broker the amount owed, which might even be more once commissions are figured in.

A majority of the risks and stresses involved with buying on margin can be reduced by keeping within the minimum margin.