Trading question

Sometimes when I buy a security online I get this message: a “security with special margin requirements”. The purchase always executes so what does this mean? Google’s answer is unclear to me.

Thanks very much.

I have seen the margin message when you sell a stock and then buy another with the proceeds before sale closes two days later.

Its a warning that you will be responsible for margin interest on the purchase if the sale fails to close on time.

I wonder how often sales fail to close? Would broker let you sell shares before deposited in your account? Or a short fails to cover? I think this is very unlikely. Just lawyers being very careful.

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In addition to pauleckler’s answer, it can also mean your broker has marked the company’s securities as particularly high risk, and thus not eligible for the same level of margin as it normally extends.

For instance, if your broker typically has a 50% margin requirement, you can borrow $5,000 on margin to buy $10,000 worth of stock. If it decides the stock is particularly high risk, it could completely eliminate your ability to use margin at all to buy it. As a result, if you want to buy $10,000 worth of the stock, you’d better have $10,000 in actual cash available.

Where this tends to get dicey for investors - aside from the basic risk of margin in general - is that brokerages can change the rating of a stock at their discretion. They will often “close the barn door after the horses have escaped” and raise margin requirements after a stock has fallen sharply. That can either trigger a margin call where none had existed before or make an existing call worse.

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Unless you are trading on margin, the message is irrelevant.

Who notes brokers provide these messages for legal liability to make sure that margin traders understand they are undertaking risk and absolving the broker of any responsibility…

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