A margin is much like buying stocks on loan. An investor borrows funds from a brokerage firm to purchase stocks and pays interest on the loan. The stocks themselves are held as collateral by the brokerage firm. The brokerage firm and the investor must follow many rules when buying securities on margin. The Federal Reserve Board sets the rules for margin requirements. If these requirements are not met, an account holder can receive either a maintenance margin call or a fed margin call.
Maintenance Margin Calls
A maintenance margin is set after the initial purchase. The Federal Reserve Regulation T sets this requirement at 25%, although many brokerage firms require more, such as 30% to 40%. A maintenance margin at 25% means a minimum equity amount must be valued at 25% or more of the margin account's total value.
If one or more securities in the account falls below a certain price and these requirements are not met, the investor receives a maintenance margin call. Depositing money or marketable securities to increase the equity in the account or selling positions in the account to pay down the loan will satisfy the maintenance margin call.
Fed Margin Calls
Regulation T states an initial margin must be at least 50%, although many brokerage firms set their requirements higher at 70%. This means an investor must pay 50%, or more if the brokerage firm requires it, of the security's purchase price up front.
When an investor purchases stocks and does not have enough equity in the account to meet the 50% equity requirement, a fed margin call, also called a Regulation T margin call, is triggered. Depositing money or marketable securities will satisfy the fed call. If it is not satisfied, a liquidation violation may be placed on the margin account. (For related reading, see "Margin Trading.")