Understanding the differences between an initial margin and a maintenance margin is a key concept for anyone who decides to trade on margin. Trading on margin is not commonly done in stock trading except by professional investors and institutional traders. However, trading on margin is standard practice in the futures markets and forex (FX) trading. The ability to trade on a relatively low margin, with high leverage, is part of what attracts many speculators to futures and forex trading.
Key Takeaways
- Trading on margin is common for futures and forex traders and refers to the practice of paying only a portion of an investment's price, which is called the margin.
- In futures trading, the margin requirements can be as low as 3% to 12% of the traded contract value.
- The initial margin is the amount a trader must deposit with their broker to initiate a trading position.
- The maintenance margin is the amount of money a trader must have on deposit in their account to continue holding their position, which is typically 50% to 75% of the initial margin.
- In futures trading, if the funds in the margin account drop below the maintenance margin level, the trader will receive a margin call requiring the immediate addition of more funds to increase the account back to the initial margin level.
Trading on Margin
When security traders buy on margin, they pay only a portion of the stock price, which is called the margin. They borrow the balance of the stock price from a stockbroker. The stocks the trader has purchased then serve as collateral for the loan. An investor who buys stocks on margin must establish a margin account with their broker, which allows them to borrow funds from their broker without paying the full value for each trade.
Trading stocks on margin is most common in short selling. According to Regulation T of the Federal Reserve Board, the initial margin requirement allows traders to borrow up to 50% of the purchase price of equity securities purchased on margin. The actual amount will depend upon the broker's requirements and some brokers may require the trader to have more than 50% on deposit.
In futures and forex trading, the margin requirements are much lower—as low as 1% to 5% of the traded contract value. Margins on futures contracts are typically 3% to 12% per contract. The margin posted by a trader represents a good faith deposit that the trader must keep on hand with the broker. This affords the trader a high level of leverageto greatly amplifythe effect of price changes in terms of the dollar amount of gain or loss in the trader's account.
If the market moves in the trader's favor, this leverage enables the trader to realize significant profits on even small price changes. However, if the market moves against the trader's position, a moderate price shiftamplified by the leverage usedcan lead to losses greater than the trader's margin deposit.
When trading on margin, an investor should also consider the interest or other fees charged by their broker in order to calculate the true cost of the trade and the profit or loss potential.
Initial Margin Requirements
The initial margin requirement is the amount a trader must deposit to initiate a trading position. For futures contracts, the clearinghouse sets the initial margin amount. Brokers, however, may require traders to deposit additional funds beyond the initial margin requirement in order to establish and maintain the account.
Once a futures trading position is established, a trader must maintain a certain balance established by the broker—typically 50% to 75% of the initial margin—to continue holding the position.
Maintenance Margin
In futures trading, if the account falls below the specified maintenance margin level, then the broker sends the trader a margin call. This informs the trader that they must immediately deposit sufficient funds to bring the account back up to the initial margin level. If the trader fails to do so promptly, the broker will close out the trader's market position.
Example of Initial Margin and Maintenance Margin
If the initial margin requirement for trading one gold futures contract is $1,000 and the maintenance margin requirement is $750, then if the balance in the trader's account drops to $725, the trader must deposit an additional$275 to bring the account back to the initial margin level.
Another alternative is for the trader to sell other investments in the portfolio to raise the funds needed to bring the account back to the initial margin level. If the trader fails to respond to the margin call in a timely fashion or does not have the money to bring the account back up to the initial margin, the broker can then liquidate the position. Some brokers may automatically liquidate a position once it drops below the maintenance margin level.
FAQs
The initial margin is the amount a trader must deposit with their broker to initiate a trading position. The maintenance margin is the amount of money a trader must have on deposit in their account to continue holding their position, which is typically 50% to 75% of the initial margin.
What is the difference between margin and initial margin? ›
A margin account allows an investor to purchase stocks with a percentage of the price covered by a loan from the brokerage firm. The initial margin represents the percentage of the purchase price that must be covered by the investor's own money and is usually at least 50% of the needed funds for U.S. stocks.
What is the difference between initial margin and maintenance margin Ninjatrader? ›
Initial Margin is the balance required to carry one contract to a new trading session. Maintenance Margin is the amount required to carry the same position for multiple days.
What is the difference between a maintenance margin and margin call? ›
A margin call occurs when the value of securities in a brokerage account falls below a certain level, known as the maintenance margin, requiring the account holder to deposit additional cash or securities to meet the margin requirements.
What is a maintenance margin? ›
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 FINRA requirements.
What determines maintenance margin? ›
Maintenance Margin Definition
Minimum margin requirements for leveraged accounts are regulated by the government. Currently the Financial Industry Regulatory Authority (FINRA) sets the maintenance margin at 25% of the total value of securities that a trader holds in their margin account.
What is initial margin in simple words? ›
Initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account.
What is initial margin and maintenance margin in futures? ›
These contracts are marginable, meaning that a trader only needs to put up a portion of the total notional value of the trade, known as the initial margin. If the price of the underlying falls, the trader will have to come up with more money, known as maintenance margin, in order to keep the trade active.
What is an initial margin? ›
Initial margin refers to the equity to be contributed by the investor trading on margin to the margin account, and it is expressed as a percentage of the total purchase price. It helps distinguish the borrowing capacity of the margin account holder.
What is the difference between initial margin and intraday margin? ›
Intraday Margin rates are effective from the product open until 15 minutes prior to the session close when Initial Margin is required. Initial Margins are set by the exchange and represent the amount required to hold a position into the next trading session.
The margin is a percentage of the money you would place down as you open a new trading position. It's a percentage of the total amount you agreed to invest. A used margin is the amount already assigned to open positions.
Is maintenance margin the initial amount of equity required for a margin purchase? ›
Maintenance Margin vs Initial Margin
After purchase, a trader must have a certain minimum amount of equity in their margin account. This is referred to as the maintenance margin. The initial margin is the share's purchase price proportion that the trader must cover with cash.
What is an example of a maintenance margin? ›
Margin Account Value Calculation Example
If the brokerage's maintenance margin is 25%, the formula for calculating the account balance that triggers the margin call is as follows: Margin Account Value = ($12,000 Margin Loan) / (1 – 0.25 Maintenance Margin %) Margin Account Value = $16,000.
What is another name for maintenance margin? ›
Maintenance margin, also known as variation margin, is the amount of capital that must be available in your account to keep a leveraged trade open. It ensures you always have enough money to fund the present value of the position and cover any running losses.
What is the maintenance margin quizlet? ›
The minimum maintenance margin requirement is set by FINRA at 25% of the long market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 25% minimum. Note that Regulation T sets initial margin at 50%.
What is the difference between independent amount and initial margin? ›
Independent Amount is the same concept as initial margin except that the term in- dependent amount only applies to uncleared OTC swaps that are collateralized and initial margin applies to derivatives of all types that are cleared.
Why is my margin maintenance so high? ›
Stocks that are known to be more volatile, for example, typically have higher maintenance requirements to ensure you have enough portfolio value to cover the position if it quickly decreases in value.
