Maintenance margin implies the minimal level of equity that needs to be retained in a margin account until a margin call is made as the account value does not reach the minimum criteria. This margin may also be referred to as the "variation margin."
The investor must have a particular amount of money in their margin account. This requirement of maintenance margin is a prerequisite for the trader to be able to borrow money and trade on margin. Hence it is only applicable in margin accounts that deal with financial leverage.
Maintenance margin implies the minimum cash needed for a margin trade to stay open. Therefore, this margin is used and is applicable only in the context of margin accounts.
A leveraged trading account is referred to as a margin account. This means that a buyer is not required to pay up the total value of a share to keep a trading position in the account. Instead, they are simply obliged to make a deposit, known as a margin, a defined percentage of the entire value of the financial instrument they are investing in. Instead, they are not required to make a down payment. The trader is, in effect, taking a loan against the remaining investment value from the brokerage or other investment business they are employing.
Margin accounts allow users to acquire an investment in shares, bonds, or futures using money loaned from the brokerage. In addition, they can engage in leveraged trading, which means that transactions can be made using more capital than they have. As a result, the aggregate dollar value of all investments made may be more than the current account balance.
Investors can trade with a portion of the price protected by a loan from the brokerage firm through the use of margin accounts.
The authorities adjust the criteria for the minimum amount of margin that must be maintained in trading accounts having leverage. Also, each broker or such business is responsible for determining its margin criteria per the applicable legislation. Mostly, the minimum margin criteria imposed by a brokerage business are higher than those mandated by the government. As a result, it offers an additional layer of financial protection to the brokerage business and its customers.
The broker already conveys the maintenance margin or assumes it as per the regulatory guidelines given by FINRA. Then, using calculates the Margin account value using the percentage given to understand the amount to be paid.
It is calculated through the following formula:
Margin account value = Margin loan / 1 – maintenance margin %
Let us look at the hypothetical example to understand the concept better.
Consider a trader having $100,000 worth of stock in their margin account. Then they must always have a minimum of $25,000 in their account. If they see a rise in the worth of their equity to $150,000, then the maintenance margin will also increase to $30,750. Conversely, if the value of the investor's shares drops below the maintenance margin, the trader will get a margin call.
Let us look at the difference between the maintenance and initial margins.
To open a trading position, a trader must make a deposit equal to an amount known as the starting margin with their broker. The amount of money an investor has to have on deposit in their account at all times to maintain their position is referred, l to as the maintenance margin.
What is maintenance margin in futures?The minimum amount of margin balance that must be present in your account at all times for your futures position to be considered active is the margin. Likewise, the minimal amount of money that has to be in your trading account at all times for your broker or the exchange to take losses from that account is referred to as the maintenance margin.
How is maintenance margin calculated?The Financial Industry Regulatory Authority (FINRA) has decided that the maintenance margin should be 25 percent of the entire value of the securities that a trader keeps in their margin account.
This article has been a guide to what is Maintenance Margin. Here, we explain it with its formula, calculation, and example and compare it with the initial margin. You may also find some useful articles here -
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