Initial Margin Meaning, Requirements, vs Maintenance Margin

For futures contracts, exchanges set initial margin requirements that can be as little as 3% or 12% of the contract to be traded. The initial margin requirement is the amount a trader must deposit to initiate a trading position. Brokers, however, may require traders to deposit additional funds beyond the initial margin requirement in order to establish and maintain the account. FINRA Rule 4210 requires that you maintain a minimum of 25% equity in your margin account at all times.

That is, you must provide a minimum of 50% (initial margin) of the value of the trade you want to initiate. For the trader to get a loan from the broker, he is required to deposit a certain amount which serves as a sign of good faith, as well as partial collateral for the loan. This initial deposit is called a margin, and it must not be less than $2,000 for a stock trader. For futures traders, the value is broker-dependent — some brokers may require $5,000 or more, while those that offer mini and micro accounts may accept as low as $500. Margin trading is a method of trading whereby an investor borrows money from the broker to complement his own funds when buying or selling a security. To be able to trade on margin, the investor needs to open a margin account with the broker.

1. The initial margin requirement is the amount a trader must deposit to initiate a trading position.
2. Should investors not be able to contribute additional equity or if the value of an account drops so fast it breaches certain margin requirements, a forced liquidation may occur.
3. Margin trading is a method of trading whereby an investor borrows money from the broker to complement his own funds when buying or selling a security.
4. Brokerages need to balance client opportunities with risk management when setting prudent initial margin levels.

Is Margin Trading Right for You?

During the stock market boom of the late 1920s, there was so much optimism about the stock market that a lot of people bought stocks with borrowed money. All they needed to do then was put down 10-20% of the cost of the stocks (initial best online stock trading courses in 2021 margin). So they could borrow up to 80 to 90 percent from the brokers, which were mostly the banks. In other words, margin trading is used to amplify trading results so as to realize bigger profits when the trades are successful.

For example, it is used as a catch-all term to refer to various profit margins, such as the gross profit margin, pre-tax profit margin, and net profit margin. The term is also sometimes used to refer to interest rates or risk premiums. The Securities and Exchange Commission has stated that margin accounts “can be very risky and they are not appropriate for everyone”. In a general business context, the margin is the difference between a product or service’s selling price and the cost of production, or the ratio of profit to revenue. Margin can also refer to the portion of the interest rate on an adjustable-rate mortgage (ARM) added to the adjustment-index rate. If you contribute your full $7,000, your total purchasing power rises to $15,000.

Margin requirements in action

When this happens, the broker requires the account holder to deposit enough money to meet the maintenance margin, which may cause a scramble for cash. In futures and forex trading, the margin requirements are much lower—as low as 1% to 5% of the traded contract value. The margin posted by a trader represents a good faith deposit that the trader must keep on hand with the broker. This affords the trader a high level of leverage to greatly amplify the gbpnok great britain pound vs norwegian krone gbp nok top correlation effect of price changes in terms of the dollar amount of gain or loss in the trader’s account.

Margin and Margin Trading Explained Plus Advantages and Disadvantages

Other important requirements are maintenance margin and variation margin. The maintenance margin is the minimum equity amount that an investor must always maintain in their account. So, suppose the equity value falls below the maintenance margin requirement. In that case, the firm issues a margin call to make the investor deposit the amount white label payment gateway services required to increase the equity value sufficient to meet the maintenance margin.

Thus, margin investing can be a powerful tool for experienced investors, but it comes with increased risks that one must understand and manage prudently. Hence, the investor can borrow only the amount remaining after the margin requirement. If, on the other hand, your initial margin is 25%, your purchasing power multiplier is 4.