If you trade stocks or other securities, you have definitely come across the term “maintenance margin”. But what exactly does it mean? Check out the explanation below to find out!
What Is A Maintenance Margin?
The term “maintenance margin” refers to the minimum amount of equity that an investor must maintain in their margin account to keep their position open. Equity in this context is the difference between the current value of the securities held in the account and the outstanding margin loan.
The maintenance margin is usually expressed as a percentage of the total market value of the securities held in the account.
What You Need To Know About The Maintenance Margin
The maintenance margin definition is best explained through an example. Let’s say you purchase $10,000 worth of securities using a margin account. Your broker may require you to maintain a maintenance margin of 25%, which means you must have at least $2,500 worth of equity in your account.
If the value of your securities falls below this threshold, your broker may issue a margin call, requiring you to deposit additional funds to bring your account back to the required maintenance margin level.
The maintenance margin can vary depending on the type of security being traded as well as the broker’s policy. Besides, this threshold can change over time due to a variety of factors, including market volatility and changes in regulatory requirements.
Keeping the maintenance margin in check is essential for investors engaged in margin trading. If an individual fails to meet the maintenance margin requirements, the broker may liquidate their position, which may result in significant losses.
Therefore, it is crucial for investors to understand the maintenance margin concept and ensure that they stick to the required level of equity in their margin account at all times. This way, they can avoid unnecessary losses and reduce their overall risk exposure when trading on margin.
