Initial and maintenance margin are separate margin requirements investors must adhere to when trading on margin. The two requirements are similar in that they are both sums of money that the broker requires the investor to have in their account to open or maintain a position with a margin loan. The main difference between the two is that the initial margin is the amount of money required to open a position, while the maintenance margin is the amount needed to keep a position open.
Investors interested in trading on margin need to understand the similarities and differences between initial and maintenance margin. Moreover, knowing how to calculate maintenance margin may help investors from being subject to a margin call or other adverse outcomes.
What Is Initial Margin?
Initial margin is the minimum amount of cash or collateral an investor must deposit in a margin account in order to buy securities on margin.
Initial Margin Requirements
The initial margin requirement is expressed as a percentage of the total purchase price of a security. The Federal Reserve Board’s Regulation T requires a minimum initial margin of 50% for stock purchases, meaning investors must have cash or collateral to cover at least half of the market value of stocks they buy on margin. However, Regulation T only sets the minimum for margin accounts. Stock exchanges and brokerage firms can set their initial margin requirement higher than 50% based on a stock’s volatility, the state of the markets, or other considerations.
How Initial Margin Works
If you meet the initial margin requirement, your broker will provide you with a margin loan to cover the rest of the trade’s purchase price. For example, if the initial margin requirement is 50% and an investor wants to purchase $6,000 of a stock, then the investor will have to cover an initial margin of $3,000 with cash or other equity and borrow $3,000 from the broker to make the trade.
Investors use margin trading as a way to increase their buying power. In the example above, if the investor bought the same amount of stock in a cash account, then they would need $6,000 in cash to make the trade. But by using a margin, the investor doubles their buying power by using only $3,000 to buy $6,000 worth of stock.
However, using margin involves risk, and may lead to more significant losses than buying stock directly in a cash account. If a trade declines below the threshold, investors will need to bring it back up to effectively pay back the margin loan.
Recommended: Cash Account vs Margin Account: Key Differences
What Is Maintenance Margin?
Maintenance margin is the minimum amount of equity an investor must have in their margin account to keep a position open after making a trade. The margin equity in the account is the value of securities minus the amount of the margin loan borrowed to make the trade. If the account’s equity falls below the maintenance margin, the broker may issue a margin call or close out the investor’s trade.
Maintenance Margin Requirements
Maintenance margin is usually expressed as a percentage of the position’s value. The Financial Industry Regulatory Authority (FINRA), which regulates maintenance requirements, says maintenance margin must be at least 25% of the total market value of the securities bought on margin. However, like initial margin, brokerage firms may have higher maintenance requirements, depending on various factors like market volatility and liquidity.
How Maintenance Margin Works
Suppose an investor purchased $6,000 worth of stock by paying $3,000 in cash and borrowing $3,000 from their broker, and the broker has a 25% maintenance margin requirement. If the market value of the stock drops from $6,000 to $5,000, the investor’s equity will now be $2,000 ($5,000 – $3,000 margin loan) and the maintenance margin will be $1,250 ($5,000 x 25%). In this case, the investor still has enough equity to cover the maintenance margin.
However, if the stock’s value drops to $3,500, the investor will no longer have enough equity to cover the maintenance margin requirement. The investor’s account has $500 in equity ($3,500 – $3,000), while the maintenance margin is $875 ($3,500 x 25%). The broker will likely issue a margin call, requiring the investor to deposit additional funds into the account or sell some assets to increase the equity in the account.
The broker may also sell some of the investor’s holdings without notifying them to bring the account back up to the maintenance margin level.
The purpose of the maintenance margin is to protect the broker in case the value of the securities in the account falls.
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Initial Margin vs Maintenance Margin
Here’s a quick look at how initial margin and maintenance margin stack up:
| Initial Margin vs Maintenance Margin | |
|---|---|
| Initial Margin | Maintenance Margin |
| 50% minimum initial margin requirement regulated by the Federal Reserve Board’s Regulation T | 25% minimum maintenance margin requirement regulated by FINRA |
| Initial margin is deposited at the start of a trade | Maintenance margin must be maintained throughout the life of a trade |
Similarities
Initial margin and maintenance margin are similar in that they are both used as deposits to cover potential losses in a margin account. The two margin requirements are both calculated as a percentage of the value of the account’s assets.
Additionally, both initial margin and maintenance margin can be increased or decreased by an exchange or brokerage firm depending on a stock’s volatility, the financial situation of a client, and other factors.
Differences
The initial margin is the amount of cash or collateral an investor must deposit with a broker when buying or selling an asset on margin. In contrast, the maintenance margin is the minimum amount of equity an investor must maintain in their account to keep the account open and avoid a margin call.
Another difference between the two is that the initial margin is typically higher than the maintenance margin.
Calculating Initial and Maintenance Margin
There are formulas for calculating both initial margin and maintenance margin. Note that the examples below may not include margin figures that are indicative of a typical brokerage firm, or of SoFi.
Initial Margin Calculation
The formula for calculating initial margin is:
Initial margin = initial margin percentage x total purchase price of security
So, if a brokerage firm has an initial margin percentage of 65% and an investor wants to buy $10,000 worth of stock ABC, then the initial margin would equal $6,500:
$6,500 initial margin = 65% initial margin percentage x $10,000 total purchase price
In this scenario, the investor would need to have $6,500 in an account and borrow $3,500 with a margin loan.
Maintenance Margin Calculation
The formula to calculate maintenance margin is:
Maintenance margin = Total value of securities owned on margin x maintenance margin percentage
So, if a brokerage firm has a maintenance margin percentage of 30% and an investor holds $1,000 of stock XYZ (100 shares at $10 per share) in their margin account, then the maintenance margin would equal $300:
$300 = $1,000 x 30% maintenance margin percentage
In this scenario, the investor would need to have $300 in equity in their margin account to avoid being subject to a margin call.
Investing Tips From SoFi
Understanding the nuances of initial and maintenance margin is essential before investors start trading on margin. Utilizing margin can help investors increase their buying power, but it comes with more risk, like the chance for margin calls.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
FAQ
Why is initial margin higher than maintenance margin?
The initial margin is higher because the Federal Reserve Board’s Regulation T sets a 50% minimum initial margin requirement, while FINRA sets a lower 25% minimum maintenance margin requirement.
How do you calculate maintenance margin?
Maintenance margin is the minimum equity an investor must have in the margin account after making a trade. Maintenance margin is expressed as a percentage of an investor’s total trade. Investors can calculate maintenance margin by multiplying the maintenance margin percentage by the total value of the margin account.
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