What does Regulation T specify regarding margin purchases?

Regulation T, established by the Federal Reserve Board, governs the extension of credit by brokers and dealers to customers for the purpose of purchasing securities. One of the key provisions of Regulation T is the requirement that investors can finance a maximum of 50% of the purchase price of securities on margin. This means that when an investor wants to buy securities, they must pay at least half of the purchase price using their own funds, while the remaining half can be borrowed from the broker.

This regulation aims to ensure that investors have a significant equity stake in the securities they purchase, reducing the risk involved for both investors and brokers. Allowing only a certain percentage to be purchased on margin helps mitigate systemic risk in the financial markets, as it prevents excessive leverage.

The other options are not reflective of Regulation T's provisions. For instance, the requirement to pay 100% upfront would contradict the very nature of margin trading, which is based on borrowing to increase purchasing power. Similarly, allowing unlimited margin trading would expose investors to potentially significant risk, which is contrary to the intent of the regulation. Lastly, the applicability of Regulation T is not limited to institutional investors; it applies to all investors, including individuals.