What is Maintenance Margin?
Maintenance margin is the minimum equity an investor must maintain in their margin account after purchasing securities. The Financial Industry Regulatory Authority (FINRA) currently sets this requirement at 25% of the total value of the securities in a margin account.
Key Takeaways
- Maintenance margin is the minimum equity an investor must retain in a margin account after a purchase.
- This margin is currently set at 25% based on FINRA standards.
- Dropping below the maintenance margin triggers a margin call, compelling the investor to either add funds or liquidate positions.
Thriving with Knowledge: Understanding Maintenance Margin
While FINRA requires a minimum maintenance margin of 25%, many brokerage firms may mandate an even higher margin, usually between 30% to 40%. Alternate terms for maintenance margin include minimum maintenance or maintenance requirement.
A margin account is an arrangement with a brokerage that allows an investor to purchase securities such as stocks, bonds, or options using funds loaned by the broker. Both margin accounts and margin purchasing come with stringent rules. One vital rule is the maintenance margin, which dictates the minimum equity—the total value of the investor’s securities minus any loans from the brokerage—that must always be in the margin account.
For example, if an investor holds $10,000 worth of equity in their margin account, they must ensure that the account maintains at least $2,500 in equity. If the value of the equity climbs to $15,000, the maintenance margin requirement rises to $3,750. Failing to meet this minimum would lead to a margin call, requiring the investor to replenish the account.
Margin trading involves powerful regulations from federal and self-regulatory bodies to minimize potential severe losses for both investors and brokers. Key regulatory organizations include the Federal Reserve Board and FINRA.
Comparing Margin Accounts and Maintenance Margins
Investors must sign an agreement with their brokerage before opening a margin account. This agreement, approved by FINRA and the Federal Reserve Board, ensures a minimum margin is in place before trading can occur. To start trading, investors must have a minimum or initial margin of at least $2,000 in cash or equivalent securities.
The Federal Reserve Board’s Regulation T (Reg T) limits how much an investor can borrow, typically up to 50% of the security’s price. Some brokerages, however, may require a larger initial deposit.
After purchasing a security on margin, the maintenance margin requirements by FINRA take effect, requiring at least 25% of the securities’ total market value to stay in the account. Specific brokers might ask for even more, as specified in the margin agreement.
If a margin account’s equity drops below the maintenance margin, the investor will face a margin call. This notice demands that the investor deposits more into the margin account to cover the shortfall or sells securities to bring the account back to the minimum requirement. Brokers retain the right to liquidate securities—even without the investor’s consent—to meet this requirement, often issuing warnings before taking action. Persistent inability to meet a margin call could lead to enforced liquidation of assets.
Initial and maintenance margins, maintenance and Reg T margin calls, and FINRA regulations exist due to the high potential for significant gains and equally substantial losses in margin trading. Unchecked significant losses could destabilize the securities markets and disrupt the larger economy.
Related Terms: investment equity, margin call, Regulation T, securities trading, federal call.
References
- Financial Industry Regulatory Authority. “Margin Account Requirements”.
- TD Ameritrade. “Margin Handbook”, page 5.
- Electronic Code of Federal Regulations. “Title 12: Banks and Banking. Chapter II - Federal Reserve System. Subchapter A. Part 220 - Credit by Brokers and Dealers (Regulation T)”.
- U.S. Securities and Exchange Commission. “Margin: Borrowing Money to Pay for Stocks”.
- TD Ameritrade. “Margin Handbook”, Page 4.
- Nasdaq. “Federal Margin Call”.
