What it means
Buying stock with borrowed money is as old as markets, and so are its crashes. Regulation T, issued by the Federal Reserve in 1934, is the rule that has governed broker credit to customers ever since.
The Fed's own summary describes its scope: credit by brokers and dealers, including the rules for margin accounts and the initial margin requirement. The headline number is 50%: a customer buying stock on margin must put up at least half the purchase price, and the broker may finance the rest against the shares.
The rule emerged from the wreckage of 1929, when 10% margins let small declines wipe out buyers and cascade through brokers; the new regime gave the Fed a lever it could tighten when speculation ran hot. For decades the Fed adjusted the initial rate actively, moving it between 40% and 100% as a brake on market excess, before settling it at 50% in 1974, where it has remained.
Regulation T also disciplines settlement: cash accounts must pay for purchases promptly, and the famous good faith and freeriding violations are Reg T's way of banning trades funded by their own sale proceeds. The rule is a floor, not the whole building: FINRA's maintenance margin and brokers' own house requirements stack on top, and brokers can always demand more cushion than the regulation requires.
For a non-finance reader, Regulation T is the down payment rule for stock speculation: half your own money up front, pay for what you buy, and the broker keeps the right to ask for more. The Fed's lever fell into disuse for an instructive reason: adjusting the initial rate proved a blunt instrument against bubbles, moving legitimate credit and speculation together, and modern central banks reach for other tools first.
Day trading lives inside the same framework with its own overlays: FINRA's pattern day trader rules have historically required a minimum equity of $25,000, an American answer to leverage-fuelled churn that Reg T's floor alone did not address, though that threshold is set by FINRA and can be revised. The global picture varies by design: other jurisdictions set margin through exchanges or regulators with different numbers, but the 1934 insight, that someone must cap broker credit, travels everywhere.
In practice
Real-world examples.
Example
A trader buys $40,000 of stock with $20,000 of her own money, the maximum leverage Regulation T allows at purchase. The broker lends the other $20,000 against the shares. Any further purchase needs fresh equity or excess equity in the account.
Example
A cash account sells shares before paying for them and is flagged for a freeriding violation. The broker restricts the account for a period, even though the customer never intended to borrow. The trade was effectively funded by its own sale proceeds.
Example
A broker raises house margin above the regulatory floor on a volatile stock ahead of earnings. The house can always ask for more. Customers holding the stock face a larger equity requirement overnight.
Formula
Calculation
Initial margin: at least 50% of the purchase price in equity. Buying power in a standard margin account equals twice the excess equity. Cash accounts must pay within the standard settlement window, which has shortened over time.
Worked example. A fictional trader buys $40,000 of stock in a margin account. Initial margin is 50% x $40,000 = $20,000 of her own money, and the broker lends the other $20,000. If the stock falls 35%, the position is worth $40,000 x 0.65 = $26,000, the loan is still $20,000, and equity is $26,000 - $20,000 = $6,000. With a 30% house maintenance requirement, required equity is 30% x $26,000 = $7,800, so the margin call is $7,800 - $6,000 = $1,800. Against FINRA's 25% floor, required equity would be $6,500 and the shortfall only $500, which shows why house requirements can bite first.Case study
Seen in the real world.
This case study is fictional and illustrative. A made-up retail trader in Texas opens a margin account with $20,000 and buys $40,000 of a volatile tech stock, using the full 50% initial margin Regulation T permits. The broker's house maintenance requirement is 30%, above FINRA's floor. The stock falls 35% in a fortnight.
His equity shrinks to $6,000 against a $26,000 position, breaching maintenance, and the margin call demands $1,800 within days. He wires the money and survives the first call, but a second leg down forces the broker to liquidate half the position at the lows, locking in losses the unleveraged version of the trade would have ridden out. Reviewing the wreckage with the firm's margin desk, he learns the mechanical lesson Reg T embodies: the regulation capped his initial leverage, but nothing capped his conviction, and the gap between the two numbers was his tuition. He now trades with half the permitted leverage, a policy the margin desk says is the most common ending to stories like his.
Watch out
Common mistakes.
- Confusing initial and maintenance margin; Regulation T sets the 50% entry requirement, while FINRA and house rules govern what happens after.
- Treating the regulatory floor as safe leverage; brokers can and do demand more, and the legal maximum is not a recommendation.
- Ignoring cash account rules; freeriding and good faith violations restrict the account even when no borrowing was intended.
Questions
People also ask.
What is Regulation T?
The Federal Reserve's 1934 rule governing credit brokers extend to securities customers, setting the 50% initial margin and cash account settlement rules.
What is the initial margin requirement?
At least 50% of the purchase price in the customer's own funds, unchanged since 1974 after decades of active adjustment.
How does it differ from maintenance margin?
Regulation T governs the opening of positions; maintenance requirements, set by FINRA and brokers, govern how much equity must remain afterward.
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