Initial Margin: Definition, Minimum Requirements, Example

While the stock increased in value by 100 percent, the investor’s $6,500 increased in value by more than 150 percent. Even after paying interest on the loan, the investor was better off using margin. Maintenance margin helps ensure account holders maintain collateral in the account should the value of their securities fall.

Another key difference is that maintenance margin requirements force investors to sell (or add more funds) before they lose everything. That means it is not possible to buy and hold a position using margin. The initial margin limit does not, in and of itself, prevent an investor from clinging to a losing investment until the end. The investor’s equity would be only $1,500, or 30 percent of the value of the margin account.

Most brokers specify a maintenance margin, which refers to the minimum equity investors must have in their margin accounts after each trade. If your asset falls below this value, your broker may issue a margin call to bring your account value above the maintenance requirement. Initial margin vs. maintenance margin reflects two different aspects of the margin buying process, though the two are mathematically connected.

Continuing with the same example used for the initial margin, imagine the maintenance margin is 30 percent. The value of the margin account is the same as the value of the 1,000 shares. The investor’s equity will always be $3,500 less than the value of the shares since the investor must pay back that money. The initial margin for stocks at U.S. brokerages must be at least 50 percent, according to Regulation T.

  1. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.
  2. However, if the account holder opens a margin account and deposits the 50% initial margin requirement, or $100,000, the total purchasing power will rise to $200,000.
  3. Continuing with the previous example, imagine that the price of the stock doubled to $20 per share.
  4. The initial margin for stocks at U.S. brokerages must be at least 50 percent, according to Regulation T.
  5. If you find yourself coming up short, an investment broker will commonly allow you to purchase stocks or other assets on margin.

Another alternative is for the trader to sell other investments in the portfolio to raise the funds needed to bring the account back to the initial margin level. Some brokers may automatically liquidate a position once it drops below the maintenance margin level. In futures and forex trading, the margin requirements are much lower—as low as 1% to 5% of the traded contract value. The axitrader review 2020 by financebrokerage margin posted by a trader represents a good faith deposit that the trader must keep on hand with the broker. This affords the trader a high level of leverage to greatly amplify the effect of price changes in terms of the dollar amount of gain or loss in the trader’s account. When security traders buy on margin, they pay only a portion of the stock price, which is called the margin.

Note that forex and commodities traders are allowed to establish positions using much more leverage. If an investor wants to purchase 1,000 shares of a stock valued at $10 per share, for example, the total price would be $10,000. A margin account with a brokerage firm allows investors to acquire the 1,000 shares for as little as $5,000. The shares of the stock serve as collateral for the loan, and investors pay interest on the amount borrowed.

Is the initial margin returnable?

That means an investor must maintain enough cash or collateral value in the account to cover 25% of the securities owned. The two both relate to the amount of cash vs. the amount you can borrow when investing. In other words, you can’t borrow more than half the price of the investment. If your broker permits margin trading, it’ll specify an initial margin requirement, which will be expressed as a percentage.

Initial Margin

That would cover no more than $3,500 with a loan, meaning the investor would need to pay $6,500. An investor borrows funds from a brokerage firm to purchase shares and pays interest on the loan. If a trader buys an oil contract, and then the price drops $2, the value of the contract has fallen $2,000.

However, if the market moves against the trader’s position, a moderate price shift amplified by the leverage used can lead to losses greater than the trader’s margin deposit. Brokers protect themselves from losses by requiring a maintenance margin. In fact, the Financial Industry Regulatory Authority (FINRA) requires a minimum maintenance margin of 25%, though some brokers will charge more.

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How Do Initial Margin and Maintenance Margin Differ?

The initial margin is the initial amount of money a trader must place in an account to open a futures position. The amount is established by the exchange and is a percentage of the value of the futures contract. For futures contracts, exchanges set initial margin requirements that can be as little as 3% or 12% of the contract to be traded. According to Regulation T of the Federal Reserve Board, the initial margin requirement allows traders to borrow up to 50% of the purchase price of equity securities purchased on margin. The actual amount will depend upon the broker’s requirements and some brokers may require the trader to have more than 50% on deposit. In contrast, the maintenance margin is the amount of equity that must be kept in the margin account going forward.

What Is Initial Margin?

This is the initial amount the trader must place in the account to open a position. Currently, FINRA requires that the maintenance margin be set to a minimum of 25%. However, brokers can ask for a higher margin requirement for certain volatile stocks and assets. Continuing with the previous example, imagine that the price of the stock doubled to $20 per share. The investor will need to repay the brokerage firm the $3,500 for the loan, leaving $16,500 after an initial investment of $6,500.

If the balance in the account is less than the maintenance margin, the trader must place additional funds to meet the maintenance margin. If the trader does not meet the margin call, the broker or exchange could unilaterally liquidate the position. Understanding the differences between an initial margin and a maintenance margin is a key concept for anyone who decides to trade on margin. Trading on margin is not commonly done in stock trading except by professional investors and institutional traders. However, trading on margin is standard practice in the futures markets and forex (FX) trading. The ability to trade on a relatively low margin, with high leverage, is part of what attracts many speculators to futures and forex trading.

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