Maintenance Margin

Loading the player...

What is a 'Maintenance Margin'

A 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. Buying On Margin

    The purchase of an asset by paying the margin and borrowing the ...
  2. House Maintenance Requirement

    The minimum amount of equity that an account holder must maintain ...
  3. Minimum Margin

    The initial amount required to be deposited in a margin account ...
  4. Margin Call

    A broker's demand on an investor using margin to deposit additional ...
  5. Cross Margining

    An offsetting position where market participants are able to ...
  6. Margin Debt

    1. The dollar value of securities purchased on margin within ...
Related Articles
  1. Options & Futures

    Margin Trading: The Dreaded Margin Call

    In the previous section, we discussed the two restrictions imposed on the amount you can borrow. First, the initial margin, which is the initial amount you can borrow. Second, the maintenance ...
  2. Options & Futures

    Margin Trading: Conclusion

    Here's the bottom line on margin trading: You are more likely to lose lots of money (or make lots of money) when you invest on margin. Now let's recap other key points in this tutorial: ...
  3. Markets

    Intermediate Guide To E-Mini Futures Contracts - Margin

    Margin is essentially a loan that a brokerage firm extends to a client (the trader or investor) that is used for the purchase of trading instruments. Margin trading allows traders and investors ...
  4. Investing

    Buying on Margin

    When an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
  5. Professionals

    Buying on Margin and Maintenance Margin

    CFA Level 1 - Buying on Margin and Maintenance Margin. Learn the process of buying stock on margin. Discusses the role of a brokerage firm and the possibility of a margin call.
  6. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  7. Options & Futures

    Margin Trading: What Is Buying On Margin?

    The Basics Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able ...
  8. Professionals

    Margin Accounts

    Margin Accounts
  9. Professionals

    Cash and Margin Accounts

    FINRA/NASAA Series 66 Section 2 - Cash and Margin Accounts. This section discusses cash account, margin accounts and regulation T in detail.
  10. Professionals

    Margin Requirements

    Margin Requirements
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 does it mean when I get a maintenance margin call?

    Understand how maintenance margin calls work, and learn about how margin requirements are different for trading stock versus ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  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