Can You Buy Mutual Funds on Margin? Understanding Securities You Can't Leverage

Ever wanted to double down on mutual funds but hit a wall? That’s because mutual funds fall into a special category—they’re restricted from margin purchases. But it’s not just mutual funds facing this limitation. Let’s break down what securities can’t be bought on margin and why.

The Real-World Impact: Why Some Investors Can’t Use Leverage

When you purchase securities on margin, you’re basically borrowing from your brokerage to amplify your buying power. Sounds great until the market turns against you. That’s exactly why regulators and brokers restrict certain assets from margin trading.

Here’s the catch: can you buy mutual funds on margin? The answer is generally no—at least not within the first 30 days of purchase. The settlement period for mutual funds operates differently from stocks, making them too risky for margin accounts during this window. The same 30-day restriction often applies to certain ETFs as well.

Without the ability to leverage these investments, your strategy needs adjustment. You can’t borrow to amplify potential returns, which means you’re paying the full price out of pocket. For some investors, this is frustrating. For brokers and regulators, it’s essential risk management.

Which Securities Can’t Be Bought on Margin?

The list of margin-restricted assets is surprisingly broad. Understanding what falls into this category helps you plan your portfolio strategy effectively.

Penny stocks are the poster child for margin restrictions. Trading below $5 per share with minimal liquidity and extreme volatility, they’re simply too risky. Brokerage firms refuse to let these be collateral for margin loans.

Initial public offerings (IPOs) land on the restricted list immediately after launch. Fresh stocks can swing wildly in price, creating unacceptable risk for margin accounts. The restriction stays in place during the most volatile trading period.

Over-the-counter (OTC) securities operate in the shadows of formal exchanges. Without robust transparency or regulatory oversight, OTC assets lack the liquidity needed for safe margin trading. Brokers steer clear.

Options contracts represent another restricted category. These derivatives move unpredictably and can lose value rapidly, making them unsuitable for leveraged positions.

And circling back: mutual funds on margin aren’t allowed during their settlement period. The same applies to certain ETFs in their first month.

Who Sets These Rules? Federal Reserve and FINRA

The Federal Reserve and the Financial Industry Regulatory Authority (FINRA) are the gatekeepers here. They’ve established clear guidelines determining which securities are marginable versus non-marginable. These regulations exist to protect both individual investors and maintain market stability.

The logic is straightforward: highly volatile or illiquid securities create too much downside potential if things go wrong. Margin calls become catastrophic. Rather than wait for disasters, regulators proactively restrict these assets from leveraged trading.

Marginable vs. Non-Marginable: The Core Difference

Most stocks, bonds, and major ETFs are marginable—they meet regulatory criteria and carry acceptable risk profiles. You can borrow against them to increase your investment size.

Non-marginable securities require full cash payment. You can’t borrow. This caps your leverage potential but also caps your losses. The trade-off is real: less explosive gains, but less explosive losses too.

When using margin on marginable assets, profits multiply if the market moves your way. But if it moves against you, losses spiral just as fast. Margin calls demand immediate action—deposit more cash or liquidate positions. This pressure has wiped out countless investors.

Restricting assets like penny stocks, IPOs, and mutual funds from margin trading removes that pressure cooker scenario. It’s protection wrapped in limitation.

Why This Matters for Your Strategy

If you’re planning to invest heavily and were counting on margin to stretch your capital, margin-restricted securities force a recalculation. You’ll need sufficient cash reserves, or you’ll need to concentrate your portfolio on marginable alternatives.

But here’s the benefit: forced cash payment prevents over-leverage. You’re less likely to find yourself underwater on a margin call. It encourages more deliberate, thoughtful investing rather than reactive, desperate moves.

The bottom line? Understand which securities can’t be bought on margin, assess whether margin is right for your strategy anyway, and build a portfolio that aligns with your actual risk tolerance and financial goals. Not all investing needs leverage to be successful.