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.
