Margin maintenance represents the smallest amount a trader must keep in a trade account to hold an active leveraged position in the securities markets. The margin maintenance amount covers the position value and any losses. A broker will issue a margin call if the trader lets the funds drop below the margin maintenance level. Margin calls can have serious consequences if the trader doesn’t have the funds to respond.
In this article, Benzinga dives into everything traders need to know about margin maintenance.
How Does Margin Maintenance Work?
Margin maintenance is the lowest equity amount a trader must maintain in a margin account to keep margin positions open. Margin maintenance is expressed as a percentage of the total securities held in the margin account. Regulatory authorities and brokers set the margin maintenance level.
The main reason for meeting margin maintenance requirements is to avoid margin calls. Falling below the maintenance margin will trigger a margin call. An investor who receives a margin call must promptly deposit funds. If the maintenance margin isn’t restored, the broker can liquidate all open positions.
When a margin call is issued, and the investor cannot meet it, the brokerage firm may liquidate some or all of the investor's positions to cover the debt. This action can lead to significant financial losses and may result in the depletion of the investor's entire account.
Margin Maintenance Requirements
Brokers typically set the requirements for margin maintenance. These requirements vary depending on the securities traded, the investor risk profile and regulatory guidelines. Most brokerage firms follow set principles when establishing margin maintenance requirements.
Levels of risk and volatility differ between securities. More volatile or risky securities require a higher maintenance margin. Experienced traders with a proven track record may receive more favorable margin terms.
Calculation of Margin Maintenance
This is the formula for calculating margin maintenance
Margin Maintenance = (Total Value of Securities) × (Maintenance Margin Percentage)
Where:
The total value of securities is the combined value of all the securities held in the margin account. To get this value, multiply the number of shares or contracts by the current market price. Then, sum up the values of all securities in the account.
The maintenance margin percentage is the minimum percentage of the total securities’ value that must remain in the margin account.
Consequences of Failing Margin Maintenance
Failing to meet margin maintenance requirements can have significant consequences. These include margin calls, forced liquidation and financial losses.
A margin call is triggered if the margin account securities fall below the maintenance margin level. The broker will demand that the investor deposit more funds to restore the equity to or above the maintenance margin requirement. The investor usually has a few days to meet the margin call.
If an investor does not meet the margin call within the allotted time, the brokerage firm can liquidate some or all of the investor's positions. The broker will use the proceeds to recover the borrowed funds and protect its interests. Forced liquidation during unfavorable market conditions can return losses.
If the proceeds of the forced liquidation don’t cover the borrowed funds, the investor must carry the remaining debt. If an investor consistently fails to meet margin maintenance requirements and incurs losses, the brokerage may close the margin account to limit the risk. Failure to meet margin requirements can impact your credit score and could affect your ability to borrow money or get credit.
Strategies for Managing Margin Maintenance
Understand your broker’s margin requirements before trading on margin. If you are new to margin trading, start with small positions and gradually increase your exposure as you gain experience. Avoid overleveraging. High leverage can amplify losses if the market moves against you.
Stop-loss order use is essential for risk management. These orders automatically trigger a market sell order if the security price falls to a predetermined level. Setting stop-loss orders helps to limit losses and protect your capital. Diversifying your portfolio spreads risk and can reduce the impact of adverse price movements.
Constantly track your margin account and market conditions. Use fundamental and technical analysis to gain valuable insights into trading decisions. Keep cash reserves to meet margin calls. Available funds can help you respond quickly to margin requirements.
Margin trading is emotionally challenging, especially when markets are volatile. Stay disciplined and avoid making impulsive decisions.
Exploring Margin Maintenance in Different Markets
Margin maintenance requirements vary across markets because of market characteristics and regulatory framework differences.
Stocks
The U.S.Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate margin trading. The standard margin maintenance requirement for stocks is 25%. Brokers may set higher requirements. Highly volatile or lower-priced stocks may have higher margin requirements to cover increased risks.
Forex (Foreign Exchange)
Margin trading in the forex market is often called leverage because traders can control larger positions with less capital. Forex brokers offer various leverage ratios and margin maintenance requirements. For example, a 1:50 leverage ratio means you can control $50 in the market with $1 of your capital.
Futures
Futures contracts are agreements to buy or sell assets at a predetermined price and date in the future. Futures markets are volatile, and exchange authorities may adjust margin requirements in response to changing market conditions. Some futures contracts have higher margin requirements during overnight trading sessions.
Margin Maintenance vs. Initial Margin
The initial margin requirement is the minimum equity a trader must deposit when opening a new margin position. It represents the percentage of the total value of the securities that the trader needs to put up as collateral. The broker lends the trader the remaining funds to cover the full cost of the securities.
The initial margin requirement is relevant only when opening a new margin position. Once the position is established, the initial margin becomes a part of the overall equity in the account.
Margin maintenance, on the other hand, is the minimum equity a trader must maintain in the margin account to keep the margin position open. It is expressed as a percentage of the total value of the securities held in the margin account.
Margin maintenance is an ongoing requirement throughout the margin position. Traders must regularly track their accounts to ensure the equity is above the margin maintenance level.
Understand the Intricacies of Margin Maintenance
Traders wanting to harness the power of leverage must navigate the intricacies of margin maintenance. Traders who understand margin maintenance requirements can mitigate risk and make informed decisions. Margin trading offers lucrative opportunities, but it is not without its hazards. Adherence to margin maintenance requirements is a non-negotiable part of prudent financial management.
Frequently Asked Questions
How is the maintenance margin calculated?
The formula for margin maintenance. Margin Maintenance = (Total Value of Securities) × (Maintenance Margin Percentage)
What does maintenance margin mean?
Maintenance margin is the minimum amount of equity a trader must have in their account to keep margin positions open.
What happens if you go below margin maintenance?
When you go below margin maintenance, you will receive a margin call. If you don’t put additional funds into your account in the allotted time, your broker will close all or some of your positions, and you may lose money.
About Anna Yen
Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.