They Explain Why

Explain maintenance margin requirements

The Difference Between Initial and Maintenance Margin
In our last lesson we continued our course on the logistics of stock trading, with an introduction to trading on margin. In today's lesson we will continue our discussion of margin, with a look at some of the rules surrounding trading on margin.

Because the stock market is an exchange traded market, many of the rules and regulations surrounding trading on margin are standardized. This is in contrast to the spot forex market, which we learned about in our last course, where it is generally the broker that sets margin requirements. A second difference that it is important to understand is that unlike in the forex market where you do not pay anything extra when trading on margin, in the stock market you pay interest on the money loaned to you by your broker, so there is an extra cost to trading on margin in the stock market.

Now that we have that out of the way, the two most important terms to make sure you understand before trading stocks on margin, are what are referred to as initial margin and maintenance margin.

Initial margin is very simply the percentage of a stocks price that you are required to have in your account, when purchasing that stock on margin. Regulations stipulate that the minimum margin that an individual can trade on under normal conditions is 50% (although some brokers require more). So, for example, if you were buying $10, 000 worth of a particular stock, the you would be required to have at least $5000 in your account in order to do so. If you had more than this then this would be no problem, but if you had less than this you could not purchase the stock.

Maintence margin on the other hand, is the amount of money you are required to have in your account once the position is opened. Basically there are two different margin requirements for opening and then holding a position, to give the trader room for a position to move against him or her once it is opened, without having to put up additional margin funds. The minimum maintenance margin that a trader is required to have in order to hold an open position, is 25% (although some brokers require more). So, using our same example where a trader purchased $10, 000 worth of stock, once the position is open, the trader will be required to have 25% of the current market value of the position in his or her account in order to continue holding the position. If the price did not move, then the trader would need at least $2500 in his or her account in order to continue holding the position. If the position moved against the trader however and fell to a market value of $9000, then the trader would need (.25*9000) or $2250. Similarly, if the position moved in the traders favor and moved up to a market value of $11, 000, then the trader would need $2750 in order to continue holding the position.

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Self-Regulatory Organizations; ICE Clear Europe Limited; Order Granting ..  — Insurance News Net
ICE Clear Europe states that the changes to the Risk Policy amend the calculation of CDS initial margin requirements to comply with margin requirements under EMIR Article 41 and Article 24 of the implementing Regulatory Technical Standards. /5/ ICE ..

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Popular Q&A

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What are Initial and maintenance margin requirements?

The initial margin requirement is the amount required to be collateralized in order to open a position. Thereafter, the amount required to be kept in collateral until the position is closed is the maintenance requirement. The maintenance requirement is the minimum amount to be collateralized in order to keep an open position. It is generally lower than the initial requirement. This allows the price to move against the margin without forcing a margin call immediately after the initial transaction.


 


 


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