Margin accounts work differently than other trading accounts. Instead of allowing the trader to do regular trades, the margin account allows leveraged trades. This means that the trader can buy securities including stocks, bonds, or options for more than the amount that they have in their account, paying only a deposit on the trade. They borrow the rest of the cash needed for the investment from the broker.
But in order to take advantage of this loan, the trader does have to maintain a certain amount of funds in their margin account — and that’s the maintenance margin.
Maintenance Margin Definition
In margin trading, the maintenance margin is the minimum amount of funds that a trader must hold in their portfolio to avoid being issued a margin call, for as long as they are actively involved in a trade. If a trade they enter decreases in value, the trader may owe money, which is taken from their account.
Minimum margin requirements for leveraged accounts are regulated by the government. Currently the Financial Industry Regulatory Authority (FINRA) sets the maintenance margin at 25% of the total value of securities that a trader holds in their margin account.
Specific brokerage firms also maintain their own requirements. It is common for brokerage requirements to be higher than the government required amount to provide the firm with greater financial security.
Margin maintenance requirements shift based on various factors, including market liquidity and volatility. And different stocks have differing maintenance requirements: if they are more likely to be volatile, the requirements may be higher.
Does a Maintenance Margin Mitigate Risk?
Not for the trader. Margin investing is risky because traders can lose more money than they have in their account, creating a debt with the broker.
Recommended: What Is Margin Debt?
When a trader opens a margin account, they must sign an agreement and deposit a certain amount into the account before they can start trading. To pay off any debt from assets that have lost value, the trader will need to deposit additional funds, deposit securities, or sell off holdings.
Therefore, margin trading isn’t recommended for beginner traders, and it’s important for traders to understand the risks and how it works before trying it out.
Increase your buying power with a margin loan from SoFi.
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*For full margin details, see terms.
Maintenance Margin Requirement Examples
Let’s look at an example of how maintenance margin requirements work.
Let’s say a trader wants to purchase 100 shares of Company XYZ at $40 per share. They don’t have sufficient funds to purchase the entire number of shares. The trader can use a margin account which allows them to purchase the entire amount of shares but only deposit a percentage of the total price into the trade and also pay a financing fee. This deposit amount is known as the initial margin requirement.
In this example, the initial maintenance margin requirement is 40% of the purchase price of the trade. For the trader to purchase the full 100 shares, they need to maintain a balance of 40% of the trade purchase amount in their margin account.
When Maintenance Margin Requirements Aren’t Met
If the amount in their account dips below the minimum requirement, their broker will issue a margin call notification. Generally, the trader will have between 2-5 days to either add more funds to their account or sell some of the assets they are invested in to move enough cash funds back into their account.
If the trader doesn’t sell holdings or add funds to their account to meet the margin maintenance requirement, the broker may sell the trader’s securities without notifying them, and they have the right to decide which ones they sell. They are also allowed to charge the trader commissions and even sue the trader for losses.
A margin call can also be sent out if the brokerage firm changes their requirements, which they can do at any time.
Calculating Maintenance Margin
Each brokerage firm has their own maintenance margin requirements. The formula to calculate the maintenance margin is:
Account value = (Margin Loan) / (1 – Maintenance Margin %)
This can be used to determine the stock price that will trigger a margin call.
For example, a trader opens a margin account and deposits $20,000 into it, then borrows $10,000 from the broker in a margin loan in order to purchase 200 shares of stock at a price of $100 each. The broker’s maintenance margin is 30%. Here is what the calculation would be to figure out what account balance would trigger the margin call:
($10,000 Margin Loan) / (1 – 0.30 Maintenance Margin %) = $14,285.71
That means that if the trader’s account dips below $14,285.71, or if the price of the stock falls below $71.43 ($14,285.71 / 200 shares) then the broker will issue a margin call.
Recommended: What Is Margin Interest and How to Calculate Ith
Maintenance Margin vs Initial Margin
When traders open a margin account, there is an initial margin amount they are required to deposit before they can start trading. This is set by FINRA, and brokers may also have their own additional requirements. The initial margin required by FINRA is currently $2,000 in cash or securities.
After a trader starts buying on margin, they must meet the maintenance margin on their account — at least 25% of the market value of the securities in their account.
The Takeaway
A maintenance margin is a monetary buffer for traders with margin accounts. The maintenance margin is a minimum balance required to execute leveraged trades. If a trader’s margin account dips below the minimum set by FINRA and the broker, the broker will issue a warning, or margin call, so that the trader can add cash to their account or sell holdings to cover the gap.
Interested in trading on margin? If you have the experience and the risk tolerance, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.
Photo credit: iStock/StockRocket
*Borrow at 7.00%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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