What is a Maintenance Margin?
A maintenance margin is a limit after which a brokerage firm can make a.
How Does a Maintenance Margin Work?
How It Works/Example:
A is a loan from a brokerage firm. The proceeds are used to make an .
Let's assume you want to buy 1,000 of Company XYZ for $5 per share but don't have the $5,000 necessary to do so -- you only have $2,500. If you buy the shares on , you essentially borrow the other half of the from the brokerage firm and collateralize the loan with the Company XYZ shares. This original loan amount as a percentage of the investment amount is called the initial margin.
If the value of the Company XYZ shares drops past a certain point, say 25% of the original $5,000 value (or $1.25 per share; this point is called the maintenance margin), the brokerage firm may make a , meaning that within a few days you must more or sell some of the shares to offset all or part of the difference between the actual price and the maintenance margin.
Why Does a Maintenance Margin Matter?
margin call. For these reasons, accounts are generally for more sophisticated investors who understand and can handle the risks.
Brokers have maintenance margins because, in our example, they have lent you $2,500 and want to mitigate the risk of you defaulting on the loan. Federal Reserve regulations and the 's internal policies determine the initial margin and maintenance minimum percentages. accounts must follow a agreement, which the investor must sign, as well as regulations imposed by the National Association of Securities Dealers, the Federal Reserve and even the New York Exchange.