Maintenance Margin
Maintenance margin is the minimum equity an investor must hold in the margin account after the purchase has been made; it is currently set at 25% of the total value of the securities in a margin account as per Financial Industry Regulatory Authority (FINRA) requirements.
Definition: Maintenance margin refers to the minimum capital that investors must hold in their margin accounts after purchasing stocks. According to the Financial Industry Regulatory Authority (FINRA), the current maintenance margin is set at 25% of the total value of securities in the margin account.
Origin: The concept of maintenance margin originated in the early 20th century when financial markets were highly volatile, and investors frequently used leverage for trading. To protect market stability and investors' interests, regulatory bodies gradually introduced maintenance margin requirements. FINRA, after its establishment, further standardized this requirement.
Categories and Characteristics: Maintenance margin is primarily divided into two categories: initial margin and maintenance margin. The initial margin is the minimum capital required when investors first purchase stocks, typically 50% of the purchase amount. The maintenance margin is the minimum capital that must be maintained in the account during the holding period, usually 25% of the total value of the securities. The higher initial margin aims to prevent excessive leverage, while the lower maintenance margin is mainly to cope with market fluctuations.
Specific Cases: Case 1: Suppose Investor A purchases stocks worth $10,000 in a margin account with an initial margin of 50%, requiring a deposit of $5,000. As the market fluctuates, the stock value drops to $8,000. According to the 25% maintenance margin requirement, Investor A needs to maintain at least $2,000 in capital. If the account's capital falls below $2,000, Investor A will receive a margin call to cover the shortfall. Case 2: Investor B holds stocks worth $20,000 in a margin account with an initial margin of $10,000. The stock value rises to $25,000, and the maintenance margin requirement is $6,250 (25% of $25,000). Since the account's capital already exceeds the maintenance margin requirement, Investor B does not need to add more funds.
Common Questions: 1. What is a margin call? When the account's capital falls below the maintenance margin requirement, investors receive a margin call, requiring them to cover the shortfall within a specified time. 2. What happens if the margin call is not met? If investors fail to meet the margin call within the specified time, the broker has the right to forcibly sell some or all of the securities to restore the account's maintenance margin level.
