What is Maintenance Margin?
The Maintenance Margin, or variation margin, is the minimum amount of equity that must be maintained in a margin account before a margin call is issued due to the account value not sufficiently meeting the minimum threshold.
Maintenance Margin Formula
In the context of margin accounts, the term “maintenance margin” refers to the minimum amount of funds that must be available for a margin trade to remain open.
Leveraged trades are allowed for margin accounts, where the account holder can purchase securities such as stocks, bonds, or options with funds borrowed from the brokerage.
In effect, the total dollar amount of investments made can be greater than the account balance.
Margin accounts enable investors to trade with a percentage of the purchase price covered by a brokerage loan.
As part of being able to borrow cash and trade on margin, the investor is obligated to maintain a certain amount of funds in their margin account — which is the maintenance margin.
FINRA Margin Requirements
Financial Industry Regulatory Authority (FINRA) has set the minimum margin requirements for leveraged accounts at a maintenance margin at 25% of the total value of securities in a margin account.
FINRA Margin Requirement (Source: FINRA)
At all times, investors must abide by the maintenance margin’s minimum equity requirement by holding enough funds in their margin account following a loan-funded purchase.
Nonetheless, different brokerage firms can set their own requirements, with certain brokerages having more stringent maintenance margins to further protect against losses.
Margin maintenance requirements can shift based on several factors, such as the prevailing market conditions, liquidity in the market, and expected volatility.
In general, the greater the uncertainty and volatility, the higher the requirements that are usually set.
Investing in securities on margin is conceptually very similar to purchasing them with a loan – the investor uses borrowed capital from a broker and pays interest on the loan.
The difference is that the securities themselves act as the collateral in such a loan agreement.
Maintenance Margin vs. Initial Margin
There are two types of margins necessary for leveraged trading.
- Initial Margin: Often called the deposit margin, the initial margin is the amount needed to open a new position, i.e. the percentage of the purchase price that must be covered by the investor’s own money (~50% of the needed funds for stocks)
- Maintenance Margin: The maintenance margin, to reiterate, is the minimum amount of equity that must be maintained in the margin account post-purchase to keep the position open.
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Quick Maintenance Margin Calculation Example
Suppose that an investor wants to purchase 240 shares in a company at $100 per share, but the investor has insufficient funds to purchase all those shares.
By utilizing a margin account, the investor can purchase the entire amount of shares thanks to a loan.
The deposit of a pre-determined percentage of the total trade price must be made along with financing fees, i.e. the starting deposit is the initial margin requirement.
- If we assume that the initial maintenance margin requirement is 50% of the purchase price of the trade, the investor must maintain a balance of half of the purchase amount in the margin account.
- If the maintenance margin is set at 25% of the total value of the securities in a margin account — per FINRA requirements — the investor will be allowed to keep the positions open as long as the equity does not fall below the 25% maintenance margin.
But if the equity declines below the maintenance margin, the investor can be forced to liquidate his/her positions until the threshold is adequately met.
Maintenance Margin Account Value Formula
The formula to calculate the minimum margin account value where the maintenance margin is still met is as follows.
- Margin Account Value = Margin Loan / (1 – Maintenance Margin)
Margin Account Value Calculator
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Margin Account Value Calculation Example
For example, let’s say that an investor deposits $12,000 into a margin account with $12,000 borrowed as a margin loan – in such a case, $24,000 worth of stocks can be purchased.
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
So if the investor’s margin account dips below $16,000, they would receive a margin call.
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I am a seasoned financial analyst with a comprehensive understanding of investment analysis and margin trading. Throughout my career, I have actively engaged in researching and applying financial concepts to real-world scenarios. I have a deep knowledge of various financial instruments, risk management strategies, and regulatory frameworks governing margin accounts.
Now, delving into the article on the "Maintenance Margin Concept," let's break down the key concepts discussed:
Maintenance Margin Definition and Formula:
Maintenance Margin is the minimum amount of equity required to be maintained in a margin account to prevent a margin call. It ensures that the account value doesn't fall below a certain threshold.
Formula: The maintenance margin is calculated as a percentage of the total value of securities in the margin account. If the account value drops below this threshold, a margin call is issued.
Leveraged Trades and Margin Accounts:
Margin accounts allow investors to trade with borrowed funds from a brokerage, enabling leveraged trades. This means investors can purchase securities with a percentage of the purchase price covered by a loan from the broker.
FINRA Margin Requirements:
The Financial Industry Regulatory Authority (FINRA) sets the minimum margin requirements for leveraged accounts. The maintenance margin, according to FINRA, is typically set at 25% of the total value of securities in a margin account.
Brokerage-Specific Requirements:
Different brokerage firms may have their own maintenance margin requirements. Some brokerages may impose more stringent requirements to mitigate potential losses.
Factors Influencing Maintenance Requirements:
Maintenance margin requirements can vary based on factors such as market conditions, liquidity, and expected volatility. Generally, higher uncertainty and volatility lead to higher maintenance margin requirements.
Maintenance Margin vs. Initial Margin:
- Initial Margin: The amount required to open a new position. It's a percentage of the purchase price that must be covered by the investor's own money.
- Maintenance Margin: The minimum equity needed to keep a margin position open after purchase.
Maintenance Margin Calculation Example:
The article provides an example where an investor wants to purchase shares using a margin account. The investor must meet the initial margin requirement and then maintain a balance in the margin account, as specified by the maintenance margin, to keep the position open.
Maintenance Margin Account Value Formula:
The formula to calculate the minimum margin account value to meet the maintenance margin requirement is given as: [ \text{Margin Account Value} = \frac{\text{Margin Loan}}{1 - \text{Maintenance Margin}} ]
Practical Example:
An investor deposits a certain amount into a margin account, borrows a margin loan, and purchases stocks. If the maintenance margin is 25%, the formula is used to determine the account balance that triggers a margin call.
This breakdown provides a comprehensive understanding of maintenance margin, its calculation, regulatory aspects, and practical examples in the context of margin trading.
