What is 'Minimum Margin'

Minimum margin is the initial amount required to be deposited into a margin account before trading on margin or selling short. A margin account allows an investor to buy securities long or sell securities short on a line of credit extended to the investor by the broker. The investor must make an initial deposit into the account to cover a certain percentage of the value of the securities the investor wishes to buy long or sell short. That minimum value must be maintained while the long or short position is open. For example, the NYSE and the NASD require investors to deposit a minimum of $2,000 in cash or securities to open a margin account. Keep in mind that this amount is only a minimum — some brokerages may require you to deposit more than $2,000.

BREAKING DOWN 'Minimum Margin'

When you buy on margin, there are key levels — as governed by the Federal Reserve Board's Regulation T — that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call.

Example of Minimum Margin

For example, if Bob wishes to trade on margin to buy shares of ABC stock, he will likely need to make sure he has at least 25% of the value of the purchase price of ABC stock in his margin account. He can borrow the rest of the purchase price from the broker. If Bob used other securities in his account as the collateral, he would have to watch the value of those securities in his account. If the market falls and the value of the other securities in his account suffers, he could be hit with a margin call which would require him to deposit more money into his margin account.

RELATED TERMS
  1. Initial Margin

    Initial margin is the percentage of the purchase price of securities ...
  2. Maintenance Margin

    Maintenance margin is the minimum amount of equity that must ...
  3. Excess Margin Deposit

    An excess margin deposit is cash or equity in a margin trading ...
  4. Buying On Margin

    Buying on margin is the purchase of an asset by paying the margin ...
  5. Margin Account

    A brokerage account in which the broker lends the customer cash ...
  6. Variation Margin

    A variable margin payment that is made by members to their respective ...
Related Articles
  1. Trading

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  2. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  3. Investing

    Leveraged Investment Showdown

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

    Pick the Right Brokerage Account for Options

    Follow these steps to pick the right options brokerage account depending on your trading needs.
RELATED FAQS
  1. What is a margin account?

    A margin account is an account offered by brokerage firms that allows investors to borrow money to buy securities. Read Answer >>
  2. What's the difference between a cash account and a margin account?

    All transactions in a cash account must be made with available cash or long positions; a margin account allows investors ... Read Answer >>
  3. Profit margin versus operating margin: What's the difference?

    There are some distinctions between profit margin and operating margin. Both measure efficiency of a firm, but one takes ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center