Maintenance Margin

Loading the player...

What is a 'Maintenance Margin'

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%.

Maintenance margin is also referred to as "minimum maintenance" or "maintenance requirement."

Breaking Down '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.

For this reason, all margin accounts, or purchasing securities on margin, have strict rules and regulations. The maintenance margin is one such rule, and it stipulates the minimum amount of equity that must be in a margin account at all times. Equity, in the context of margin trading, is the total value of securities in the margin account minus what has been borrowed from the brokerage firm.

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).

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.

After the margin agreement is signed, FINRA requires that a minimum margin be met before an investor can trade on the account. The minimum or initial margin must be at least $2,000 in cash or securities. The Federal Reserve Board’s Regulation T, or Reg T, mandates a limit on how much an investor can borrow, which is up to 50% of the price of the security purchased. Some brokerage firms require more than a 50% deposit from the investor.

Once an investor buys a security on margin, the maintenance margin goes into effect with FINRA requiring that at least 25% of the total market value of the securities be in the account at all times. Still, many brokers can require more as stipulated in the margin agreement.

If the equity in a margin account falls below the maintenance margin, the broker will issue a margin call, which requires that the investor deposit more cash into the margin account to bring the level of funds up to the maintenance margin, or liquidate securities in order to fulfill the maintenance amount. The broker reserves the right to sell the securities in a margin account, sometimes without consulting the investor, in order to meet the maintenance margin. A Federal Call is a special kind of margin call issued by the federal government.

Maintenance margins, margin calls, the Federal Reserve Board’s Reg T, NYSE and FINRA regulations all exist because margin trading has the potential to incur sky-rocketing gains, as well as colossal losses. Such losses are a huge financial risk, and if left unchecked can unsettle the securities markets, as well as potentially disrupt the entire financial market.

 

 

RELATED TERMS
  1. Margin Call

    A broker's demand on an investor using margin to deposit additional ...
  2. Initial Margin

    The percentage of the purchase price of securities (that can ...
  3. Buying On Margin

    The purchase of an asset by paying the margin and borrowing the ...
  4. Minimum Balance

    The minimum balance is the minimum amount that a customer must ...
  5. Buying Power

    The money an investor has available to buy securities. In a margin ...
  6. Federal Call

    A federal call occurs when an investor's margin account lacks ...
Related Articles
  1. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  2. Trading

    A Guide to Day Trading on Margin

    Buying on margin is a good option if you don't have the cash to day trade.
  3. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  4. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  5. Investing

    Finding Your Margin Investment Sweet Spot

    Borrowing to increase profits isn't for the faint of heart, but margin trading can mean big returns.
  6. Trading

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
RELATED FAQS
  1. How is buying on margin regulated by the Securities and Exchange Commission (SEC)?

    Learn how FINRA and the Federal Reserve regulate margin account trading, and understand how pattern day trading can impact ... Read Answer >>
  2. What are the different types of margin calls?

    Learn the differences between margin calls and fed margin calls while reviewing the definitions of each and how to satisfy ... Read Answer >>
  3. What is the difference between initial margin and maintenance margin?

    Learn the difference between an initial margin requirement and a maintenance margin requirement and how these affect an investor's ... Read Answer >>
  4. How are margin calls regulated by the SEC?

    Learn how FINRA and the Federal Reserve Board regulate trading in margin accounts, and see how brokers can liquidate positions ... Read Answer >>
  5. What are my options when I get a margin call?

    Understand what a margin call means and the two primary options for meeting a margin call, such as depositing additional ... Read Answer >>
  6. How much can I borrow with a margin account?

    Understand the basics of margin accounts and buying on margin, including what amount investors can typically borrow for purchases ... Read Answer >>
Hot Definitions
  1. Financial Advisor

    One who provides financial advice or guidance to customers for compensation. Financial advisors can provide many different ...
  2. Cost of Capital

    Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile.
  3. Sensitivity Analysis

    Sensitivity analysis is a technique used to determine how different values of an independent variable will impact a particular ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Trade War

    A negative side effect of protectionism that occurs when Country A raises tariffs on Country B's imports in retaliation for ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center