Known as "Reg T
" by hip securities-industry insiders, the Federal Reserve
Board's Regulation T sets the amount of margin
can lend to investors for the purchase of securities
. Created in 1934 as a response to the rampant overextension of credit in the 1920s which factored in the 1929
stock market crash, the margin requirement was imposed to protect unsophisticated investors from themselves.
Reg T is currently set at 50%.
Example: If an investor purchases $10,000 worth of securities on margin, he must supply $5,000 in cash.
Here's the twist: If the investor loses money, the value of the securities purchased goes down, but the amount of the loan does not. So: If $10,000 is purchased on margin, and the value of the securities goes down to $8,000, the investor must meet the Reg T requirement by depositing another $1,000.