What is Maintenance Margin?
1406 reads · Last updated: December 5, 2024
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 is the minimum amount of equity that an investor must maintain in their margin account 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 in the U.S. financial markets. As stock trading became more popular, investors began using borrowed funds for investments. To control risk, regulatory bodies established maintenance margin requirements to ensure investors could meet their financial obligations during market fluctuations.
Categories and Features
Maintenance margin is primarily divided into two categories: initial margin and maintenance margin. The initial margin is the minimum amount required when an investor first purchases securities, while the maintenance margin is the minimum amount that must be maintained while holding the securities. A key feature of maintenance margin is its dynamic nature; as market prices fluctuate, investors may need to deposit additional funds to meet the minimum requirements.
Case Studies
Case 1: Suppose Investor A purchases $100,000 worth of stocks in their margin account. According to FINRA regulations, A must maintain at least $25,000 as maintenance margin. If the stock value drops to $80,000, A may need to deposit additional funds to meet the minimum requirement. Case 2: Investor B fails to deposit additional funds during market volatility, leading to a forced sale of some stocks by the brokerage to bring the account back into compliance.
Common Issues
Common issues investors face include: How to calculate maintenance margin? What happens if the maintenance margin requirement is not met? Typically, failure to meet the requirement results in the brokerage selling some securities to bring the account back into compliance. Additionally, investors may confuse maintenance margin with initial margin; the former is the minimum requirement during the holding period, while the latter is the minimum requirement at the time of purchase.
