Loading the player...

What is 'Initial Margin'

Initial margin is the percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his own cash or marginable securities; it is also called the initial margin requirement. According to Regulation T of the Federal Reserve Board, the initial margin is currently 50%, but this level is only a minimum and some brokerages require you to deposit more than 50%. For futures contracts, initial margin requirements are set by the exchange.

BREAKING DOWN 'Initial Margin'

A margin account enables investors to use leverage and purchase more securities than the cash balance in their account would allow. A margin account is essentially a loan account in which interest is charged on the outstanding margin balance. The securities purchased in the margin account are purchased with cash loaned to the investor by the broker, and the securities themselves are used as collateral. This allows for a potential magnification in gains, but also losses. In the extreme event that the securities purchased on margin decline to zero, the investor would need to deposit the full initial value of the securities in cash to cover the loss.

Initial Margin Requirements and Example

To use a margin account, an investor needs to post a certain amount of cash, securities or other collateral, known as the initial margin requirement. In most cases, for equity securities, the initial margin requirement is 50%. As an example, assume an investor wants to purchase 10,000 shares of Company X, which is priced at $10 per share. The total cost in a cash balance account would be $100,000. If the investor opens a margin account and deposits an the initial margin requirement of $50,000, he would then have a total purchasing power of $100,000. This is how leverage is created, in this case a two-to-one leverage amount.

For futures contracts, the exchanges set the initial margin requirements, but often it is as low as 5% or 10% of the contract to be traded. For example, if a oil futures contract is for $100,000, an investor can enter into that position by posting only $5,000 of initial margin. This initial margin requirement would give the investor a 20x leverage factor. During periods of high market volatility, the exchanges may increase initial margin requirements to any level they deem appropriate, and brokers may decide to increase initial margin levels above those required by law.

Initial margin requirements are not the same as maintenance margin requirements, which also may be increased or decreased based on market volatility.

  1. Maintenance Margin

    Maintenance margin is the minimum amount of equity that must ...
  2. Option Margin

    Option margin is the cash or securities an investor must deposit ...
  3. Margin Loan Availability

    1. The dollar amount in an existing margin account that is currently ...
  4. Margin Call

    A broker's demand on an investor using margin to deposit additional ...
  5. Margin Debt

    Margin debt is debt a brokerage customer takes on by trading ...
  6. Buying Power

    The money an investor has available to buy securities. In a margin ...
Related Articles
  1. Investing

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  2. Trading

    A Guide to Day Trading on Margin

    Buying on margin is a good option if you don't have the cash to day trade.
  3. Investing

    Spreading The Word About Portfolio Margin

    An underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
  4. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  5. Investing

    Finding Your Margin Investment Sweet Spot

    Borrowing to increase profits isn't for the faint of heart, but margin trading can mean big returns.
  1. How exactly does buying on margin work and why is it controversial?

    Learn how purchasing stock on margin works, and understand the risk associated with margin accounts that make the strategy ... Read Answer >>
  2. 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 >>
  3. Do you have to sell your stocks when you get a margin call?

    Understand the implications of a margin call and what an investor's options are when the stock he purchased on margin falls ... Read Answer >>
  4. What types of financial margins should investors pay the most attention to before ...

    Learn what types of financial margins, such as profit and cash margins, an investor should pay the most attention to before ... Read Answer >>
  5. 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 >>
  6. What Does a Share Liquidation in My Account Mean?

    A liquidation occurs when an account's holdings are sold off by the firm where the account was held. Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center