Five Hundred Dollar Rule

Let’s say we have a trade account. And let’s say that, one day, we decide to invest a bunch of the money in that trade account in the latest sure thing: inflatable dinner plates. And then let’s say–-and who could have predicted this?–-that inflatable dinner plates turn into the shortest-lived “sure thing” ever because, let’s face it, it’s kinda hard to use a knife and fork with plates made out of beach ball.

So what happens to our trade account if we make some, uh, questionable investments and don’t have enough moolah in there to cover our losses? Well, the five hundred dollar rule says that, if our margin call amount (i.e., how much we need to put back into our trade account) is less than $500, our trading firm doesn’t have to liquidate our account to cover it.

This rule was put into place by the Federal Reserve, and it’s designed to protect investors–-and their investment firms-–from having to go through the rigamarole of liquidating accounts every time a wee little margin call happens.