Maintenance Margin Definition and Comparison to Margin Accounts
Maintenance Margin: Definition and Comparison to Margin Accounts
What Is Maintenance Margin?
Maintenance margin is the minimum equity an investor must hold in the margin account after the purchase; currently set at 25% of the total value of securities in a margin account per FINRA requirements.
Key Takeaways
– Maintenance margin is the minimum equity an investor must maintain in the margin account after purchase.
– Maintenance margin is currently set at 25% of the total value of securities in a margin account per FINRA requirements.
– If the account equity falls below the maintenance margin threshold, the investor may receive a margin call and be required to liquidate positions.
Understanding Maintenance Margin
FINRA requires a 25% minimum maintenance margin, but brokerage firms may require as much as 30% to 40% of the securities’ total value. Maintenance margin is also called a minimum maintenance or maintenance requirement.
A margin account allows investors to buy securities with cash loaned by the broker. The maintenance margin is the minimum amount of equity in a margin account at all times. If an investor has $10,000 worth of equity, they must maintain a minimum of $2,500 in the margin account. A margin call is issued if the value of securities falls below the maintenance margin.
Margin trading is regulated by the federal government and self-regulatory agencies such as the Federal Reserve Board and FINRA.
Margin Accounts vs. Maintenance Margins
Before opening a margin account, investors and brokerage firms must sign an agreement. The account requires a minimum margin, which must be at least $2,000 in cash or securities.
The Federal Reserve Board’s Regulation T sets a limit on how much an investor can borrow. The maintenance margin requires at least 25% of the total market value of securities to be in the account. If the equity falls below the maintenance margin, a margin call is issued.
Maintenance minimums also protect the brokerage in case of investor default.
Initial and maintenance account limits, Reg T margin calls, and FINRA regulations exist to mitigate the risks of margin trading, which can lead to significant gains or losses. Unchecked losses can disrupt the financial markets.
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