Maintenance Margin

Maintenance margin implies the minimal level of equity that needs to be retained in a margin account until a margin call is made as the account value does not reach the minimum criteria. This margin may also be referred to as the "variation margin."

The investor must have a particular amount of money in their margin account. This requirement of maintenance margin is a prerequisite for the trader to be able to borrow money and trade on margin. Hence it is only applicable in margin accounts that deal with financial leverage.

• After investing, a trader must keep a certain minimum level of equity in their margin account. This is referred to as the "maintenance margin."
• According to the regulations set forth by FINRA, the maintenance margin that must be maintained on a margin account is presently equal to 25 percent of the aggregate value of the securities held in the account.
• Suppose the investor's account equity drops below the maintenance margin level. In that case, the investor may get a margin call, obliging the investor to sell holdings until the requirement is fulfilled.

Maintenance margin implies the minimum cash needed for a margin trade to stay open. Therefore, this margin is used and is applicable only in the context of margin accounts.

A leveraged trading account is referred to as a margin account. This means that a buyer is not required to pay up the total value of a share to keep a trading position in the account. Instead, they are simply obliged to make a deposit, known as a margin, a defined percentage of the entire value of the financial instrument they are investing in. Instead, they are not required to make a down payment. The trader is, in effect, taking a loan against the remaining investment value from the brokerage or other investment business they are employing.

Margin accounts allow users to acquire an investment in shares, bonds, or futures using money loaned from the brokerage. In addition, they can engage in leveraged trading, which means that transactions can be made using more capital than they have. As a result, the aggregate dollar value of all investments made may be more than the current account balance.

Investors can trade with a portion of the price protected by a loan from the brokerage firm through the use of margin accounts.

The authorities adjust the criteria for the minimum amount of margin that must be maintained in trading accounts having leverage. Also, each broker or such business is responsible for determining its margin criteria per the applicable legislation. Mostly, the minimum margin criteria imposed by a brokerage business are higher than those mandated by the government. As a result, it offers an additional layer of financial protection to the brokerage business and its customers.

The broker already conveys the maintenance margin or assumes it as per the regulatory guidelines given by FINRA. Then, using calculates the Margin account value using the percentage given to understand the amount to be paid.

It is calculated through the following formula:

Margin account value = Margin loan / 1 – maintenance margin % 

Let us look at the hypothetical example to understand the concept better.

Consider a trader having $100,000 worth of stock in their margin account. Then they must always have a minimum of $25,000 in their account. If they see a rise in the worth of their equity to $150,000, then the maintenance margin will also increase to $30,750. Conversely, if the value of the investor's shares drops below the maintenance margin, the trader will get a margin call.

Let us look at the difference between the maintenance and initial margins.

• An important distinction is that the initial margin places a cap on the leverage used for profitable stock transactions. The investor must sustain a significant financial loss to qualify for the leverage offered by the maintenance margin.
• After purchase, a trader must have a certain minimum amount of equity in their margin account. This is referred to as the maintenance margin. The initial margin is the share's purchase price proportion that the trader must cover with cash. This proportion is typically at least fifty percent of the total amount required for U.S. equities.
• Investors must sell their assets (or contribute additional funds) to meet the maintenance margin criteria before people lose it all. However, the initial margin restriction does not preclude an investor from holding a failing investment until the end.

This article has been a guide to what is Maintenance Margin. Here, we explain it with its formula, calculation, and example and compare it with the initial margin. You may also find some useful articles here -

• Margin Call
• Margin Debt
• Buying on Margin