Do Not Call
Learn about maintenance margin, the minimum equity investors must maintain in a margin account to keep leveraged positions open. It differs from the initial margin, which is the upfront deposit required to open a position. Understanding maintenance margin is essential for managing risk, avoiding margin calls, and ensuring sufficient collateral in both stock and derivative markets.
Maintenance margin is the minimum equity an investor must keep in their margin account after buying securities on leverage. While FINRA recommends a standard of 25%, brokers may set higher requirements based on market conditions and risk exposure. Maintaining this margin helps limit potential losses and ensures the account holds adequate collateral.
A margin account allows investors to borrow funds from a broker to purchase securities. The account requires an initial deposit (initial margin) and is subject to ongoing maintenance requirements, enabling investors to leverage their capital for larger positions.
The initial margin is the minimum deposit required to open a leveraged position, while the maintenance margin is the minimum equity that must be maintained to keep the position open.
The initial margin is the upfront amount an investor must deposit when buying securities on margin, usually expressed as a percentage of the total purchase price. It ensures the broker has sufficient collateral for the loaned funds.
The maintenance margin establishes the minimum equity that must be maintained in a margin account to manage risk effectively. If the account’s equity falls below this threshold, it signals that the investor’s collateral is insufficient. This situation can trigger a margin call from the broker. The investor is then required to deposit additional funds or sell some securities. Meeting the maintenance margin helps prevent further losses and ensures the account remains in proper standing.
Maintenance Margin=Current Market Value of Securities×Maintenance Margin %
For example, if you hold securities worth ₹1,00,000 and the broker requires a 30% maintenance margin:
Maintenance Margin=₹1,00,000×0.30=₹30,000
To calculate maintenance margin, multiply the current market value of securities by the maintenance margin percentage. For instance, if the market value of shares rises to ₹1,20,000 and the maintenance margin is 25%, the required maintenance equity is ₹30,000. This level is monitored to understand potential margin requirements.
A margin call occurs when an account’s equity falls below the maintenance margin. The broker then requires the investor to deposit additional funds or sell securities to restore the minimum required equity.
Maintenance margin protects both the broker and the investor by limiting potential losses.
| Risk/Protection | Description |
|---|---|
Risk of Liquidation |
Falling below maintenance margin may force forced sale of securities |
Broker Protection |
Ensures collateral is sufficient to cover borrowed funds |
Investor Awareness |
Signals need to monitor positions and market fluctuations |
Maintenance margin requirements vary across asset types. Stocks typically follow FINRA guidelines, futures contracts have exchange-determined margins, and CFDs may require higher percentages due to leverage risks. Understanding these variations is crucial for managing leveraged positions across different markets.
Investors can calculate maintenance margin using a simple formula and table:
Maintenance Margin=Current Market Value of Securities×Maintenance Margin %
| Market Value of Securities | Maintenance % | Required Margin |
|---|---|---|
₹1,00,000 |
25% |
₹25,000 |
₹1,50,000 |
30% |
₹45,000 |
Several factors affect maintenance margin requirements:
Volatility of the underlying asset
Broker-specific risk policies
Regulatory guidelines
Size of the leveraged position
Maintenance margin ensures investors maintain a minimum equity level in leveraged accounts, protecting both the broker and the investor. Understanding its calculation, triggers, and variations across markets is crucial for managing risk effectively.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Maintenance margin is calculated by multiplying the current market value of securities by the maintenance margin percentage required by the broker.
If equity falls below the maintenance margin, the broker issues a margin call, requiring the investor to deposit additional funds or sell securities.
A margin call occurs when the account’s equity drops below the required maintenance margin due to market price movements or withdrawals.
The initial margin is the amount required to open a leveraged position, while the maintenance margin is the minimum equity that must be maintained to keep the position open.
Maintenance margins vary depending on asset type, volatility, and leverage. Stocks follow broker or regulatory guidelines, futures have exchange-set margins, and CFDs may require higher margins due to increased risk.
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