What is Maintenance Margin?
Maintenance margin is the minimum equity that an investor must hold in a margin account after a purchase; it is currently set at 25% of the total value of securities in a margin account as required by the Financial Industry Regulatory Authority (FINRA).
- Maintenance margin is the minimum amount of equity that an investor must maintain in a margin account after a purchase.
- As required by FINRA, maintenance margin is currently set at 25% of the total value of securities in a margin account.
- If account equity falls below the maintenance margin threshold, investors may be hit by a margin call, which may require investors to liquidate positions until requirements are met.
Understanding Maintenance Margin
Although FINRA requires a minimum maintenance margin of 25%, many brokerage firms may require as much as 30% to 40% of the total value of the securities.Maintenance margin is also known as minimum maintenance or maintenance requirement.
A margin account is an account with a brokerage firm that allows investors to buy securities including stocks, bonds or options — all using cash lent by the broker. All margin accounts, or buying securities on margin, have strict rules and regulations. Maintenance margin is one such rule.It specifies a minimum equity capital — the total value of securities in a margin account minus any money borrowed from a brokerage firm — that must remain in a margin account as long as the investor holds the securities purchased.
Therefore, if an investor has $10,000 worth of equity in their margin account, they must maintain a minimum amount of $2,500 in their margin account. If their equity value increases to $15,000, the maintenance margin also increases to $3,750. If the security value falls below the maintenance margin, the investor will be subject to a margin call.
Margin trading is regulated by the federal government and other self-regulatory agencies to mitigate the severe losses investors and brokers can suffer. There are multiple regulators for margin trading, the most important of which are the Federal Reserve and FINRA.
Margin Account and Maintenance Margin
Investors and brokerage firms must sign an agreement before opening a margin account. Under the terms of the agreement established by FINRA and the Federal Reserve, the account needs to meet a minimum margin requirement before investors can trade on the account. The minimum or initial margin must be at least $2,000 in cash or securities.
The Federal Reserve’s Regulation T (Reg T) sets limits on the amount investors can borrow, up to 50% of the price of the security purchased.Some brokers require investors to pay a deposit of more than 50%.
Maintenance margin comes into effect once an investor purchases a security on margin, and FINRA requires that at least 25% of the total market value of the security be in the account at all times.Nonetheless, many brokers may ask for more of the amount stated in the margin agreement.
If the equity in the margin account falls below the maintenance margin, the broker issues a margin call requesting the investor to deposit more cash into the margin account to bring the funding level to the maintenance margin or liquidate securities to meet the maintenance volume. Brokers reserve the right to sell securities in margin accounts, sometimes without consulting investors, to pay maintenance margin. Often, investors are first warned by the broker and only act if they continue to fail to pay the margin call. A federal margin call is a special type of margin call issued by the federal government.
Maintaining the minimum also removes some of the risk of brokerage if the investor defaults on the loan.
Maintenance margins, margin calls, Reg T, and FINRA regulations all exist because margin trading has the potential for skyrocketing gains as well as huge losses. This loss is a huge financial risk that, if left unchecked, could disrupt securities markets, and possibly financial markets as a whole.