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MARGIN ACCOUNTS
WITH ETRADE |
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What is Margin Trading?
When you trade "on margin", you borrow a portion of the funds you use to buy stocks so that you can take advantage of opportunities in the market. You pay interest of the funds you borrow until you repay the "loan".
What you can and can't buy on margin
There are some limitations to what you can buy with your margin account:
You can't buy just any security on margin. The Federal Reserve Board's Regulation T (Reg T) stipulates which securities you can buy on margin—are called marginable securities. At E*TRADE, we have our own list of marginable securities that you can purchase with your E*TRADE margin account.
The Federal Reserve also stipulates how much of your own funds you must use to buy marginable securities—this amount, called the initial margin requirement, is currently 50 percent of the security's value. For example, if you want to buy $8,000 shares of stock on margin, you must contribute at least $4,000 of your own money towards the purchase.
You can sell stocks short (a sale where you borrow stock from E*TRADE to sell at a higher price and repurchase at a later time at a lower price) or long (stocks you already own) with your margin account—this way you can still realize a profit when the security declines in value.
You can't put and call options or purchase new issues with a margin account.
You can't buy mutual funds with a margin account, but you can use mutual funds and new issues as collateral in a margin account if they have been owned and paid in full for 30 days. |
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Buying marginable securities at E*TRADE
Before you buy securities on margin, make sure you know:
Open a E*TRADE margin account and deposit a minimum required initial deposit $2,000 into the account.
Opening and Using a Margin Account
If you didn't apply for a margin account when you opened your E*TRADE account, you can convert your E*TRADE account as a margin account, except for retirement accounts (such as IRAs) and custodial accounts, if:
Your account balance (cash or marginable securities) is at least $2,000
You have a trust agreement that authorizes margin trading (if the account is a trust account).
How to
To apply or upgrade to a margin account:
Request the Margin/Option Update w/Customer Agreement by mail or get one online form (PDF viewer required).
At the top of the form, check Margin.
Complete everything in Sections 1 and 2. (Industry regulations require us to ask for this type of information for margin and options trading accounts.)
If the account is a business account, enter the income and net worth of the corporation or other business entity.
Have all the account holders sign and date the form.
Send your application to E*TRADE.
Note!
It should take no more than five business days for us to change trading levels once we receive your request. At that time you'll receive a Smart Alert message to let you know that your trading level is changed.
After you're authorized for options and margins trading, you'll see the terms Cash or Option Buying Power, or Margin Buying Power on your Account Balances.
After your account is approved
All buy orders that you place for marginable securities will be paid from the margin account. We'll use all available cash and money market funds, if any—we'll then charge you the current margin interest rate for the balance of the funds required to fill the order.
Note! You don't have to place any special orders or give us special instructions to buy securities on margin.
For example, if you have $2,000 cash and/or equity in your account, and you purchase $3,000 of a marginable security, the balance required for the purchase is automatically paid with a margin loan of $1,000. |
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How much interest you'll have to pay on borrowed funds and how to pay your debit balance. For more information see "Your Debit Balance and Margin Interest Rates".
Your Debit Balance and Margin Interest Rates
Paying your debit balance
You will be charged interest daily on the debit balance in your margin account. To reduce or pay off your debit balance you'll have to add funds to your account by:
Depositing funds into your account
Selling securities in your account and using the proceeds to pay the debit balance.
E*TRADE's margin interest rates
The day your trade for a marginable securities settles into your account, your margin account accrues interest daily—interest charges are posted monthly to your debit balance. The amount of interest you pay may vary and is based on the amount of money you have borrowed on margin. E*TRADE's margin interest rates are subject to change at E*TRADE's discretion without prior notice.
Note! These are today's rates, which are subject to change periodically, without prior notice. 07/18/2000 |
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Debit Balance (loan) Interest Rates
Less than $25,000 ~ 10.25%
$25,001 to $49,999 ~ 9.75%
$50,000 to $99,999 ~ 8.00%
$100,000 and above ~ 7.75% |
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Margin rates change without notice as the E*TRADE base rate changes. The base rate is set at E*TRADE's discretion with reference to commercially recognized interest rates, such as the broker call loan rate. The rates shown above are based on the base rate as of 05/19/00, which was 8.25%. Mutual funds must be held for 30 days prior to margin eligibility.
Mutual funds must typically be held in the account for 30 days before they're eligible for margin trading.
Note! These are today's rates, which are subject to change periodically, without prior notice.
Current money market fund and credit interest yields
At E*TRADE, you can choose to have your uninvested cash automatically earn interest in any of our money market funds or in the credit interest program. Plus, your cash is always available when you need it through our free checking privilege.
Mutual funds must typically be held in the account for 30 days before they're eligible for margin trading.
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How much you have to buy marginable securities—see "Buying Power and Excess Equity" for details.
Buying Power and Excess Equity
Buying power is the amount of marginable securities you can buy. You should check the buying power in your account daily—it fluctuates with the market price of the stock.
Determining your buying power is like determining the value of a house. A margin account, like a house has a market value., debt (the amount of the mortgage), and equity (the difference between the house's market value and the mortgage balance). |
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Term = House
Market Value = The price for which the house can be sold
Debt = The amount owed on the mortgage
Equity The difference between the mortgage and the market value of the house |
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Margin account
The price at which the securities in the account are currently selling for
The margin loan (the amount borrowed to pay for marginable securities)
The difference between margin loan and the market value of the securities |
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Example
If you buy 10,000 shares of Walt Disney stock that has an initial margin requirement of 50 percent, you pay $5,000 and take out a margin loan for the remaining $5,000. You would calculate the current value of your account as follows:
Walt Disney's long market value (LMV) $10,000
Your accounts debit register (DR) - $5,000
Your account equity (EQ) $5,000
Excess Equity
When the equity in your account rises to 50 percent of the market value of the securities in your account, you have excess equity. You can use the excess equity (EE) in your account to buy additional stock or you can withdraw it to take profits without closing out your positions.
To buy stocks with your excess equity, first determine how much of your own money you would have to put down if you were buying the stock at this current market value. Then subtract the stock's initial margin requirement from your account equity—that amount is your excess equity.
EE = Equity - (stock's current market value x Reg. T margin requirement)
You can't use your excess equity to pay off the debit in your margin account. As mentioned earlier, the only way you can pay the debt is by depositing funds into your account.
When your equity is less than margin requirements
When the equity in your account falls below 50 percent of the market value, your account is restricted and:
If you want to purchase additional shares, you must deposit additional funds equal to 50 percent of the securities' cash value (initial margin requirement) or 100 percent of the value of the securities that you want to purchase. For additional information about depositing funds, see "Margin Calls: Maintaining Account Equity".
If you want to sell securities, any proceeds from the sale will be credited to your debit balance.
Margin Calls: Maintaining Account Equity
Meeting margin maintenance calls
In order to protect investors from overextending their margin purchases, the NYSE and the NASD have both established what is called a "minimum maintenance requirement." This is the minimum amount of equity expressed as a percentage of the current market value of your stock position which must be in your account.
In general, at E*TRADE, the minimum maintenance requirement is 35% for a well-diversified account, and 40% for short sales. In addition, E*TRADE, and other broker/dealers, reserve the right at any time to adjust the minimum maintenance requirement on an individual account basis as well as on a stock by stock basis depending on a stock's trading volatility and other factors. E*TRADE has higher maintenance requirements for concentrated and single position accounts.
To make the point especially clear, let's say that Disney's stock drops by $30 per share. When you originally bought your 100 shares of Disney at $80 per share, your account looked like this: |
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But after the $30 price drop, your margin account looks like this:
Current Market Value
$5,000
Debit Balance
$4,000
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Equity
$1,000
Equity as percent of CMV
20 percent |
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Current Market Value
$8,000
Debit Balance
$4,000
Equity
$4,000
Equity as percent of CMV
50 percent
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As you can see, after the price drop, the equity in your account has fallen below E*TRADE's 35% minimum maintenance requirement. Whenever that happens, we try to send you a courtesy message telling you that you have a "margin maintenance call" or more simply, "margin call." However, it is important that you monitor your own account closely because there can be times when E*TRADE will have to liquidate without notifying you beforehand. E*TRADE can liquidate at any time, especially if the value of the stock is declining rapidly. In addition, a stock will no longer be eligible for margin if it declines below $3 per share. That event could also trigger a maintenance call.
Two ways to meet a margin call
Deposit additional Funds
E*TRADE prefers that you send in funds for the amount you owe. This is the best way for you to assure yourself that your account will not be sold out on the due date. Please advise Federal Express or overnight mail to make sure that the money gets to us before the due date. Please note that if your equity continues to drop, in most cases, you will receive an additional margin call. In addition, if the drop is severe, the account may be sold out anyway.
The amount of money you must deposit in your account to bring it back to the minimum maintenance requirement level is calculated by multiplying the stock position's current market value by the minimum maintenance requirement percentage. Thus, in the Disney example above, you would have $5,000 multiplied by .35 or $1,750. Then you subtract the equity that you have remaining in your account from the $1,750 and come up with $750. The $750 is the amount of money you must deposit into your account to restore it to the minimum maintenance requirement level.
Please note: The E*TRADE Margin Department will look at how much equity is in your account on the day the call is due to determine if you have put equity into the account to adequately cover the call.
The way E*TRADE actually brings your account back into balance is by adjusting your debit balance. And cash deposit in a margin account is always applied against the debit balance. In this case, your debit balance would be reduced by the $750 and the minimum maintenance requirement would be re-established.
Current Market Value
$5,000
Debit Balance
$3,250
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Equity
$1,750
Equity as percent of CMV
35 percent
Liquidate Securities
If you can't bring in the required funds, or do not want to, you may liquidate enough shares in your account to bring your equity up to minimum requirements. Please note that the amount of stock you must sell is greater than if you were to send in funds. If you do this, however, you are not guaranteed to avoid a sell out. If you liquidate out of the call, your equity continues to decrease, or you do not sell enough to meet the call, you may be issued another call, or you may be subject to a sell out by E*TRADE's Margin Department.
If you choose to liquidate out of a call by liquidating marginable securities, you must be aware that you may only receive in cash a percentage of the proceeds equal to your current equity percent.
If the account equity is below 50%, you will usually need to sell at least 2 times the amount due to cover the call. If the account equity is less than 30%, you may need to sell around 3 times the amount due.
Remember that these are approximate numbers and that you should make sure that any transactions you make have fully covered the call by checking your account balances the next day.
If on the other hand, you choose to liquidate out of a call with fully paid for cash securities, you must sell enough securities to generate the cash required to meet the call. The full dollar amount of the proceeds will be credited to the call.
What Happens If You Fail to Meet a Maintenance Call?
A margin call requires you to restore your account to the minimum maintenance requirement level by a specific date, usually within three business days of receiving the call. If you do not meet the due date yourself, E*TRADE may itself sell a portion of your long stock position to bring the equity percentage back. You are responsible for any losses taken in the stock during this process. E*TRADE will usually restore the account to higher than the 35 percent requirement to prevent another immediate decline in the stock from putting the account back into a call situation.
Meeting Fed Calls
A Fed Call is a government-required call for you to increase the equity in your account immediately because you have bought securities for which you do not have sufficient buying power. A Fed Call is issued whenever you make a purchase of a marginable security in your margin account and you do not have the minimum initial requirements of 50% cash or loan available to make the purchase. After a Fed Call has been in effect for three days, a Regulation T Extension fee of $10 may be charged to your account.
Note! E*TRADE requires full funds or buying power to cover all trades in the account prior to placing an order. Should a trade without sufficient funds available to cover it go through, you will be subject to a call. In addition, if the market value of the security declines to the point where the current equity amount in your account drops below the Federal Reserve Board minimum, you will get a Fed Call.
There are two ways to meet a Fed Call:
Sending in Funds:
The best way to clear a Fed Call is to send in the funds immediately and certainly by the due date given you by the E*TRADE margin department. This is the only way to take care of a Fed Call and not be penalized in any way.
Liquidating Securities:
If you can't send in funds, or do not want to, you may elect to liquidate securities to generate enough cash or loan availability to meet the call. If you choose to liquidate instead of sending in the funds, you must sell 2 times the amount of the Fed Call. This is considered to be a liquidation, and is charged against your account.
If you do not meet the Fed Call, the margin department will liquidate enough of your shares to meet the call. This liquidation, whether you do it yourself or E*TRADE does it for you, will be charged against your account. Four liquidations in a 12-month period will put a customer on a 90-day restriction.
If a security in your account is bought and sold in quick succession without submitting to E*TRADE payment for the purchase, it is called free-riding. Free riding violates Regulation T of the Federal Reserve Board, and may result in your account being restricted or closed.
Generally, no extensions will be granted on a Fed Call. But if there are extenuating circumstances, it is possible that an extension may be granted. This extension, however, is something that needs to be worked out between you, one of our customer service representatives, and a margin supervisor.
90-Day Restrictions
When an account is placed on 90-day restriction, it means that you must have full funds/buying power for any trade you place. Accounts on 90-day restrictions are monitored more closely and any trades you place are subject to more review than other accounts. But it does not mean that you can't use margin. Additional violations may mean that your account will be closed.
Total Account Equity - This is the total value of all your holdings including all securities and cash (Total Market Value long minus Total Market Value short plus Cash Credits minus Margin Debt). This figure shows you (based on last night's closing value of the securities in your account) how much cash you would receive if you liquidated your account.
Total Account Equity Percentage - This is the total value of all your securities minus any money you've borrowed on margin divided by the total value of all your securities. This figure tells you the percentage of the securities in your account that belong to you. |
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Which securities you can buy on margin at E*TRADE, see "Securities You Can Buy On Margin at E*TRADE".
Securities You Can Buy On Margin at E*TRADE
At E*TRADE we offer a variety of marginable securities. See following a list of the different types of securities we offer and the amount of cash or marginable securities that you must have in your margin account (E*TRADE's initial requirement) before you can buy on margin.
Note! E*TRADE reserves the right to change the list of securities and initial requirements without prior notice.
Legend:
MV Market Value of the stock
"out of the money" The condition of an options who's underlying stock's current market price is below the strike price in the case of a call, or above the strike price in the case of a put. |
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