Maintenance margin example

FINRA, the largest independent securities regulator in the USA, requires investors to keep a minimum amount of equity in their margin accounts. What is equity? In this case, equity can be defined as the value of your securities minus how much you owe your broker. This simply means that you need to own a certain portion of the securities in your account at any point in time. FINRA’s maintenance margin requirement is at least 25%; however, depending on who your stock broker is and what kind of stocks you’re investing in, you may have maintenance margin requirements of 30 to 40%. The riskier a stock is, the higher they are going to require a maintenance margin.

A Maintenance Margin Requirement Example

Pretend that you purchase securities for a total of $16, 000. You pay $8, 000 of your own money and your broker lends you $8, 000. What happens if the market value of those securities fall to as low as $12, 000. What’s your current equity? Just do some simple math. The total value of your securities is now $12, 000, but remember that you still owe your broker the cost of the loan, $8, 000. So your equity is now $4, 000.

Great. So what’s the point? Well–you need to always know what the maintenance margin requirement is at all times because if you do not meet those minimum requirements, a margin call will be issued. You will be forced to act!

So in this case, your equity is $4, 000/$12, 000 or $25 percent. But is that your brokers minimum? Let’s pretend that they have a minimum of 40% because your securities are considered slightly more risky. You would need to deposit more money into your account in order to make sure you hit 40% equity.

Here Comes the Margin Call! Oh No!

So your account is now below the maintenance margin requirement. Not good! Remember, this happens because the value of the collateral (your securities) have fallen, which also means your equity has fallen.

1. Buy more securities to increase your equity

2. Deposit more cash into your margin account to increase your equity.

You see, your broker just wants to make sure you can cover the loan! They need to see a minimum value (maintenance margin requirement) in your margin account to sleep well at night!

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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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