Definition
In finance, margin is collateral that the holder of a financial instrument has to deposit with a counterparty to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following…
Maintenance Margin
What is a ‘Maintenance Margin’
A maintenance margin is the minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%.
Explaining ‘Maintenance Margin’
As governed by the Federal Reserve’s Regulation T, when a trader buys on margin, key levels must be maintained throughout the life of the trade. First off, a broker cannot extend any credit to accounts with less than $2,000 in cash or securities. Second, the initial margin of 50% is required for a trade to be entered. Finally, the maintenance margin says that an equity level of at least 25% must be maintained. The investor will be hit with a margin call if the value of securities falls below the maintenance margin.
Maintenance Margin Basics
A margin account is an account with a brokerage firm that allows an investor to buy securities, be they stocks, bonds or options, with cash loaned by the broker. Trading on margin is used to increase the purchasing power of investors so that they can buy more stock without paying for it entirely out of pocket. Buying more stocks that then increase in value results in a greater gain for the investor; however, buying more stocks that lose value exposes the investor to much more substantial losses.
Maintenance Margins: A Walk-Through & Context
To fully understand maintenance margins one has to understand margin accounts. Before an investor opens up a margin account, the brokerage firm must obtain that investor’s signature on a margin agreement. This margin agreement must meet the minimum requirements of the regulations set forth by the Federal Reserve Board, NYSE and FINRA, but the exact terms and conditions, such as the interest rate on the account and repayment terms, vary depending on the individual broker firm’s policy. Generally, the securities purchased on the account serve as collateral. It is important to note that not all securities can be bought on margin, which requires extensive trading knowledge.
Further Reading
- Setting margin levels in futures markets: An extreme value method – www.sciencedirect.com [PDF]
- Adequacy and Consistancy of Margin Requirements in the Markets for Stocks and Derivative Products, The – heinonline.org [PDF]
- Implications of nonlinear dynamics for financial risk management – www.jstor.org [PDF]
- Stock market margin requirements – www.journals.uchicago.edu [PDF]
- Ethics, fairness and efficiency in financial markets – www.tandfonline.com [PDF]
- Option strategies: Good deals and margin calls – www.sciencedirect.com [PDF]
- Distinguished lecture on economics in government: central banking and systemic risks in capital markets – www.aeaweb.org [PDF]
