Sometimes investors will borrow money from their broker to buy stocks or other securities through what’s known as a margin account. It’s a riskier practice than traditional investing, so strict rules dictate how much capital you need to keep on hand to help mitigate potential losses.
Regulators set a minimum on that capital, which is known as maintenance margin, but many brokers will require more. If your funds drop below the threshold, you can trigger a margin call, which can come with serious consequences if you don’t act quickly.
In this guide, we’ll tell you what you need to know about maintenance margin, and why it’s so important to keep it in line.
How Does Maintenance Margin Work?
Maintenance margin is the minimum amount required to keep your margin positions open. It’s a percentage of the total securities held in your margin account. The Financial Industry Regulatory Authority (FINRA) requires a 25% minimum maintenance margin, but many brokerages require as much as 30% to 40% for added security.
For example, if you have $5,000 worth of equity in a margin account, you must maintain a minimum amount of $1,250 in the account to satisfy FINRA. If you increase the equity to $10,000, your maintenance margin will increase to $2,500.
Consequences of Failing Maintenance Margin
Failure to meet margin requirements can have severe consequences including margin calls, forced liquidation and subsequently, financial losses.
When capital in a margin account falls below the maintenance margin level, that triggers a margin call, and your broker will ask you to deposit funds within a few days to resort the equity to the minimum margin requirement.
Failure to do so within the given time can lead to liquidation of some or all of your positions. The broker will use the proceeds to recover the borrowed funds and protect its interests. Forced liquidation during unfavorable market conditions can lead to significant losses.
If the proceeds of forced liquidation are inadequate to cover the borrowed funds, you will have to carry the remaining debt. Consistent failure to meet maintenance margin requirements will not only lead to recurring losses, but the brokerage may also close your margin account in order to limit risk. Failure to meet margin requirements can also impact your credit score and affect your ability to borrow money or get credit.
Maintenance Margin vs. Initial Margin
An initial margin requirement is different from maintenance margin. The initial margin requirement is the minimum amount you must deposit when you open a new margin position. It shows the percentage of the total value of securities that you will have to put up as collateral while the broker will lend the remaining funds to cover the full cost of securities.
Initial margin is only required when you open a new margin position. Once established, the initial margin will become a part of the overall equity in your account.
By contrast, maintenance margin is the minimum amount you must have in your margin account to keep the margin position open. It is an ongoing requirement throughout the margin position, and you should track it regularly to ensure it’s above the maintenance margin level.
Strategies for Managing the Margin
Start small
As a beginner, it is best to start with small positions and increase your exposure after you gain some experience. Do not over-leverage because it can increase losses if the market doesn’t move as you expected.
Use stop-loss
A stop-loss order will automatically trigger a market sell order if the security falls below a predetermined level. By setting stop-loss orders, you limit losses and help keep your capital secure.
Diversify your portfolio
Diversification spreads risk and reduces the impact of adverse price movements. If you’re an experienced trader, use fundamental and technical analysis to get valuable insights about securities.
Keep cash reserves
Track your margin account conditions and keep cash reserves to meet margin calls. Available funds can help you respond quickly to margin requirements. Finally, stay disciplined and avoid making impulsive decisions.
Understand the Intricacies of Maintenance Margin
If you’re looking to harness the power of leverage, you must learn to navigate the intricacies of maintenance margin to reduce risk and make informed choices. Margin trading can offer lucrative opportunities, but adherence to maintenance margin requirements is a non-negotiable part of prudent investing.
Frequently Asked Questions
How can I avoid a margin call?
A margin call can be avoided by keeping a buffer above the account’s minimum maintenance requirement and setting an account-level alert whenever it falls below the specific percentage.
How is the maintenance margin calculated?
Maintenance margin = (Total Value of Securities) × (Maintenance Margin Percentage)
When does a maintenance margin increase?
If markets become more volatile, a broker may raise margins to account for increased investor risk. If markets calm down, the margin may go down as risk drops.
About Vandita Jadeja
Vandita Jadeja is an expert writer and editor with over a decade of experience in financial journalism. She holds expertise in research, writing, content strategy, SEO optimization, social media, and digital marketing. Her work has been featured in The Motley Fool, InvestorPlace, Business Insider, Nudge Global, TipRanks, 24/7 Wall St., and Joy Wallet. She believes in research, simplifying complex topics, and writing for the audience.
