Investors and brokerage firms must sign an agreement before opening a margin account. Under the terms of the agreement between FINRA and the Federal Reserve Board, the account must have a minimum margin before investors can trade on the account. The minimum or initial margin must be at least $2,000 in cash or securities. Some securities have higher margin requirements, in which case the initial and hold requirements are the same higher rates. For more information, see the table with specific margin requirements. Maintenance margin is the total amount of capital that must remain in an investment account to hold an investment or trading position and avoid a margin call. To better understand what maintenance margin is, it is important to review the underlying concepts of margin accounts and margin calls. The maintenance margin or «variation margin» is the minimum amount of equity that must be held in a margin account before a margin call is issued, because the value of the account does not sufficiently reach the minimum threshold. An exception to the 25% maintenance margin is when the investor`s account is concentrated. A concentrated account is formed when a single position is equal to or greater than 60% of the total market value of the margin. Due to the higher risk of fluctuation, the maintenance margin requirement remains at 50% when the account is concentrated.
For example: However, if the equity falls below the conservation margin, the investor may be forced to liquidate his positions until the threshold is sufficiently reached. For example: You have securities worth $10,000 purchased with $5,000 in cash and $5,000 on margin. If the total value of your investment drops to $6,000 and the amount you borrowed on margin remains at $5,000, your equity is only worth $1,000 ($1,000 / $6,000 = 16.7%), which is less than the minimum margin requirement of 25%. In the event of a margin call, the brokerage firm may require the investor to deposit additional funds or cash enough securities to bring the account back to the initial margin requirement of 50% of the initial total value of the investment. The formula for calculating the minimum value of the margin account at which the maintenance margin is always reached is as follows. If the brokerage`s maintenance margin is 25%, the formula for calculating the account balance that triggers the margin call is as follows: If the equity of a margin account falls below the maintenance margin, the broker issues a margin call that requires the investor to deposit more money into the margin account to bring the amount of funds to the maintenance margin or liquidate the securities, to meet the amount of alimony. The broker reserves the right to sell the securities in a margin account, sometimes without consulting the investor, to respect the maintenance margin. As a rule, the investor first receives a warning from his broker, and only if the margin call is still not paid is action taken. A federal call is a special type of margin call issued by the federal government. The retention margin exists to protect brokerage firms from investors who do not repay their loans. Maintaining a cushion between the loan amount and the account value reduces business risk. The risk for brokerage firms is higher when stock prices fall significantly.
Once this is the case, the brokerage firm sends a margin call to the investor. This means that the brokerage company informs the trader that he must do one of two things: put more money in the account or sell some of the shares to make up the difference between the current share price and the maintenance margin. A margin requirement is the percentage of securities eligible for margin that an investor must pay for with their own cash. It can be divided into initial margin requirement and maintenance margin requirement. Under Federal Reserve Board Regulation T, the initial margin requirement for stocks is 50% and the hold margin requirement is 25%, while higher requirements may apply to some securities. Although FINRA requires a minimum margin of 25%, many brokerage firms may require that up to 30% to 40% of the total value of securities be available. Maintenance margin is also known as minimum service or maintenance requirements. The government regulates minimum margin requirements for leveraged trading accounts. In addition, each brokerage or trading firm sets its own margin requirements in accordance with these regulations. A brokerage`s minimum margin requirements often exceed the minimum margins required by the government.
It provides additional financial security to the brokerage firm and its clients. Once the stock is purchased, the preservation margin represents the amount of equity that the investor must hold in the margin account. Regulation T sets the minimum amount at 25%, but many brokerage firms charge a higher rate. If you continue with the same example used for the initial margin, imagine that the maintenance margin is 30%. The value of the margin account is equal to the value of the 1,000 shares. The investor`s equity will always be $3,500 less than the value of the shares, as the investor will have to repay that money. Before you can fully understand maintenance margin, it`s important to understand what margin accounts are and how they work, which includes maintenance margins. In general, the greater the uncertainty and volatility, the higher the requirements usually imposed. The hold margin is the required percentage of the total investment that is less than the initial margin and that the investor must keep in their trading account to avoid a margin call – a request from their broker to deposit additional funds into their account or liquidate a sufficient amount of their holdings to settle the margin call. For our example, let`s assume that the maintenance margin is 40%. An initial margin requirement refers to the percentage of equity required when an investor opens a position. For example, if you have $5,000 and want to buy ABC shares that have an initial margin requirement of 50%, the amount of ABC shares you can buy on margin is calculated as follows: Margin accounts are useful to investors because they allow leveraged investing – the ability to hold a greater total value of investments by only having to deposit a percentage of the total value investments.