Margin Requirements Explained

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Margin Requirements

A Margin Requirement is the percentage of marginable securities that an investor must pay for with his/her own cash. It can be further broken down into Initial Margin Requirement and Maintenance Margin Requirement. According to Regulation T of the Federal Reserve Board, the Initial Margin requirement for stocks is 50%, and the Maintenance Margin Requirement is 30%, while higher requirements for both might apply for certain securities.

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 would like to purchase stock ABC which has a 50% initial margin requirement, the amount of stock ABC you are eligible to buy on margin is calculated as follows:

Buying power * 50% >> is less than or equal to $5,000.
>> Buying power >> is less than or equal to $5,000 / 50% = $10,000
>> You can purchase up to $10,000 worth of stock ABC using your margin buying power.

When an investor holds securities bought on margin, in order to allow some fluctuation in price, the minimum margin requirement at Firstrade for most stocks is lowered to 30%. This is called the Maintenance Margin Requirement. When the investor is unable to maintain the equity above the maintenance margin requirement, a margin call occurs.

For Example: You have $20,000 worth of securities bought using $10,000 in cash and $10,000 on margin. If the total value of your holding drops to $14,000 and the amount you borrowed on margin remains $10,000, your equity worth will only be $4,000, which falls below the 30% minimum margin requirement.

An exception to the 30% maintenance margin requirement is when the investor’s account is concentrated. A Concentrated Account is formed when one single position is equal to or greater than 60% of the total marginable market value. Due to the higher risk of fluctuation, the maintenance margin requirement remains 50% when the account is concentrated.

Following the example mentioned when introducing the initial margin requirement, the current price of stock ABC is $100. You now have 100 shares of stock ABC bought using $5,000 in cash and $5,000 on margin. If the price of stock ABC drops from $100 to $90 and the total value of your holding becomes $9,000, and the amount you borrowed from margin remains $5,000, your equity is now only $4,000, which is lower than the 50% minimum margin requirement for concentrated accounts.

Certain securities have higher margin requirements, in which case the initial and maintenance requirements will be the same higher rate. Please refer to the Special Margin Requirement chart to learn the details.

Initial Margin Requirement Maintenance Margin Requirement
Concentrated
Account
50% 50%
Non-Concentrated Account 50% 30%
Higher Margin Requirement Securities (Range from 45%, 60%, 75%, 90% to 100%.) Stay the same as the Initial Requirement.
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Maintenance Margin

What is Maintenance Margin?

Maintenance margin is the minimum amount of equity that an investor must maintain in the margin account after the purchase has been made and is currently set at 25% of the total value of the securities in a margin account as per New York Stock Exchange (NYSE) and Financial Industry Regulatory Authority (FINRA) requirements.

Key Takeaways

  • Maintenance margin is the minimum amount of equity that an investor must maintain in the margin account after the purchase has been made.
  • Maintenance margin is currently set at 25% of the total value of the securities in a margin account as per NYSE and FINRA requirements.
  • The investor may be hit with a margin call if the account equity falls below the maintenance margin threshold which may necessitate that the investor liquidate positions until the requirement is satisfied.

Understanding Maintenance Margin

Although NYSE and FINRA require a 25% minimum maintenance margin, many brokerage firms may require that as much as 30% to 40% of the securities total value should be available. Maintenance margin is also called a minimum maintenance or maintenance requirement.

A margin account is an account with a brokerage firm that allows an investor to buy securities including stocks, bonds, or options – all with cash loaned by the broker. All margin accounts, or purchasing securities on margin, have strict rules and regulations. The maintenance margin is one such rule. It stipulates the minimum amount of equity—the total value of securities in the margin account minus anything borrowed from the brokerage firm—that must be in a margin account at all times as long as the investor holds on to the securities purchased.

So if an investor has $10,000 worth of equity in his margin account, she must maintain a minimum amount of $2,500 in the margin account. If the value of her equity increases to $15,000, then the maintenance margin also rises to $3,750. The investor is hit with a margin call if the value of securities falls below the maintenance margin.

Margin trading is regulated by the federal government and other self-regulatory agencies in an effort to mitigate potentially crippling losses for both investors and brokerages. There are multiple regulators of margin trading, the most important of which are the Federal Reserve Board, the New York Stock Exchange (NYSE), and the Financial Industry Regulatory Authority (FINRA).

Leverage and Margin Explained

Let’s discuss leverage and margin and the difference between the two.

What is leverage?

We know we’ve tackled this before, but this topic is so important, we felt the need to discuss it again.

The textbook definition of “leverage” is having the ability to control a large amount of money using none or very little of your own money and borrowing the rest.

For example, to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1.

You’re now controlling $100,000 with $1,000.

Let’s say the $100,000 investment rises in value to $101,000 or $1,000.

If you had to come up with the entire $100,000 capital yourself, your return would be a puny 1% ($1,000 gain / $100,000 initial investment).

This is also called 1:1 leverage.

Of course, I think 1:1 leverage is a misnomer because if you have to come up with the entire amount you’re trying to control, where is the leverage in that?

Fortunately, you’re not leveraged 1:1, you’re leveraged 100:1.

Now we want you to do a quick exercise. Calculate what your return would be if you lost $1,000.

If you calculated it the same way we did, which is also called the correct way, you would have ended up with a -1% return using 1:1 leverage and a WTF! -100% return using 100:1 leverage.

As you can see, these clichés weren’t lying.

What is margin?

So what about the term “margin”? Excellent question.

Let’s go back to the earlier example:

In forex, to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000.

The $1,000 deposit is “margin” you had to give in order to use leverage.

Margin is the amount of money needed as a “good faith deposit” to open a position with your broker.

It is used by your broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits, and uses this one “super margin deposit” to be able to place trades within the interbank network.

Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, .5% or .25% margin.

Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.

If your broker requires 2% margin, you have a leverage of 50:1.

Here are the other popular leverage “flavors” most brokers offer:

Margin Requirement Maximum Leverage
5.00% 20:1
3.00% 33:1
2.00% 50:1
1.00% 100:1
0.50% 200:1
0.25% 400:1

Aside from “margin requirement”, you will probably see other “margin” terms in your trading platform.

There is much confusion about what these different “margins” mean so we will try our best to define each term:

Margin requirement: This is an easy one because we just talked about it. It is the amount of money your broker requires from you to open a position. It is expressed in percentages.

Account balance: This is just another phrase for your trading bankroll. It’s the total amount of money you have in your trading account.

While this money is still yours, you can’t touch it until your broker gives it back to you either when you close your current positions or when you receive a margin call.

Usable margin: This is the money in your account that is available to open new positions.

Margin call: You get this when the amount of money in your account cannot cover your possible loss. It happens when your equity falls below your used margin.

If a margin call occurs, some or all open positions will be closed by the broker at the market price.

Do you feel overwhelmed by all this margin jargon? Check out our lessons on margin in our Margin 101 course that breaks it all done nice and gently for you.

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