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. 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. If the equity is less than the required amount, the investor must either sell some of the securities or deposit enough money to bring the capital of the account back to the minimum required. Before you can fully understand maintenance margin, it`s important to understand what margin accounts are and how they work, which includes maintenance margins. For our example, let`s assume that the initial margin requirement is 50% of the total purchase price, which in this case equates to $1,000. To acquire the full 100 shares the investor wants, they would have to have at least $1,000 in their trading account to meet the initial 50% margin requirement. When an investor buys on margin, they essentially borrow the balance of the total purchase price from their brokerage firm, for which they are typically charged a small financing fee. 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%. If the minimum maintenance percentage is 25% (most brokers have a higher requirement), the value of an account is $20,000 and the equity (market value minus loan) is $4,000 (this means the margin loan was $16,000); First, multiply the market value by the minimum percentage required, which is $20,000 x 25%, which is equivalent to $5,000. Imagine that a trader wants to buy 100 shares of ABC Company at $20 per share, but the investor does not have the $2,000 required to buy the full amount of those shares.
If the investor has opened a margin account with his brokerage company, he can buy the shares by raising only a percentage of the total purchase price. This initial percentage is called the “initial margin requirement”. The home`s maintenance requirement is often higher than the maintenance margin set forth in the Federal Reserve`s Regulation T, which requires that a capital level of at least 25% be maintained. A home maintenance requirement is the minimum margin account amount required by a brokerage firm. Home maintenance requirements are based on the standards set out in Federal Reserve Regulation T. 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. Although Regulation T sets the minimum maintenance requirements allowed by law, brokerage firms are free to adapt their own “home” maintenance requirements, provided that their standards are stricter – i.e. higher – than the minimum requirements set out in Regulation T. Once an investor buys a security on margin, the hold margin comes into play, with FINRA requiring that at least 25% of the total market value of the securities be in the account at all times. Nevertheless, many brokers may charge more than specified in the margin agreement.
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. Often, these traders lose all profits made in previous years and may even be forced to liquidate other personal assets to repay their margin loans. Therefore, from this point of view, the need for maintenance requirements becomes much clearer.