Initial and Maintenance Margin

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 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.

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.

Maintenance 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). 

If the trader falls below the minimum maintenance margin requirement, then the traders broker will issue what is known as a margin call. A margin call requires the trader to either deposit additional funds in their account or sell some of the securities that they hold in order to bring the cash in their account up to the minimum maintenance requirement. Depending on the market situation and the rules in a specific brokers margin agreement, the broker may also sell off a traders positions at their discretion once a margin call is issued. As you can see here it is important that traders who use margin adhere to proper money management techniques, so they can avoid a situation where they are issued a margin call and their broker sells off some or all of their positions at the brokers discretion.

One last note on margin, is that regulations require that a trader have at least $2000 in their account in order to trade on margin, however some brokers may require a higher level.