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What is a Restricted Account?

Malcolm Tatum
By
Updated Feb 18, 2024
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A restricted account is a type of margin account that does not currently have enough equity or resources to allow for the additional purchase of investments on margin. This means that until the investor settles at least a portion of the current balance of the margin account, he or she will not be able to use this resource as a means of acquiring additional shares of stock, bonds, or any other assets that are normally traded using the account. In many nations, national trading regulations help to establish standards for what is considered a restricted account, making it easier for brokerages to manage these accounts uniformly.

In order to understand how a restricted account occurs, it is first necessary to define what is meant by a margin account. Essentially, this type of account allows investors to make purchases using a line of credit that is established and managed by a brokerage. Brokerages set the credit limit for a margin account based on the credit-worthiness of the investor, often taking into account such factors as the value of assets owned and the general credit rating of that investor. Typically, the investor will call upon the margin account to purchase investments, then repay the amount borrowed using the returns generated by that investment.

Should the balance of the margin account reach a level that is considered somewhat risky by the brokerage, limits on future usage of the credit are imposed, until the investor retires an additional amount of that balance. One common way this happens is the value of the investment purchased using the account fall below the current balance that the investor still owes on the margin, prompting brokerages to restrict use of the account for a time. This makes it possible to ensure that the restricted account regains enough equity to comply with any initial margin requirement that is put in place by the brokerage. Along with protecting the interests of the brokerage, this safeguard also protects the investor, in that limiting the use of the account prevents the investor from assuming more debt than he or she can reasonably expect to honor.

In many nations, brokerages set standards for restricted accounts by simply using the requirements that are put in place by governmental regulatory agencies. At times, brokerages may implement requirements that exceed those supplied by the agencies. Brokerages typically provide investors with details regarding what type of activity will trigger a margin account to gain the status of a restricted account, and what must transpire in order to lift the restriction.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By LisaLou — On May 18, 2011

That is why it is always a good idea to know what is going on with your investments and to have enough extra funds to cover positions going the wrong way, or setting up stops. It can be very frustrating to log into your brokerage account and get the message that the account has been restricted. This means that immediate action must be taken.

It is also a good idea if you are using margin, to never make so many trades that you do not leave extra funds in there because every position does not always go the way you want it to. I have tried to get in the habit of setting stops right away - not just in my head, but actually entering them on the order screen.

By honeybees — On May 17, 2011

If you are trading on margin, you should know before you make the trade what the maintenance amount is for that particular stock. This all looks good on paper, but if you position goes the opposite way of what you had hoped and you do not have enough funds to cover the difference, you will have a restricted margin account.

If your account becomes restricted you will need to deposit additional money or sell a position to meet the margin call. This can be very scary the first time it happens. I used to get slips in the mail from my broker and my heart would always drop when I saw one in the mail.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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