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Who Sets the Initial Margin Requirements on Stocks

The initial margin requirement is the margin required when buying securities, which currently must be at least 50%. The maintenance margin is the amount of equity that must be held in the margin account in the future. The minimum maintenance margin requirement set by Reg T is 25%. This means that an investor must hold enough cash or collateral in the account to cover 25% of the securities held. The Federal Reserve Board, self-regulatory organizations (SROs) such as FINRA and stock exchanges have rules that govern margin trading. Brokerage firms can set their own “home” requirements, which are more restrictive than these rules. Here are some of the most important rules you should know: Purchasing power * 50% >> is less than or equal to $5,000. >> purchasing power >> is less than or equal to $5,000/50% = $10,000 >> you can buy ABC shares worth up to $10,000 with your margin purchasing power. End of day one: A customer has 1,000 shares of XYZ in their account. The closing price is $60, so the market value of the account is $60,000. If the broker`s equity requirement is 25%, the client must hold $15,000 in equity in the account.

If the client has an outstanding margin loan on securities in the amount of $50,000, their equity is $10,000 ($60,000 – $50,000 = $10,000). The broker determines that the client should receive a margin call of $5,000 ($15,000 – $10,000 = $5,000). Some titles have higher margin requirements, in which case initial and maintenance requirements have the same higher rates. For more information, see the Special Margin Requirement table. If the value of the company`s XYZ shares falls above a certain point, say 25% of the initial value of $10,000 (or $2.50 per share; this point is called maintenance margin), the brokerage company can make a margin call, which means you`ll have to deposit more money in a few days or sell some of the shares to offset all or part of the difference between the actual share price. and maintenance margin. Suppose the share price has gone from $10 to $5. Then the margin value of the account would fall to $5,000.

The investor`s equity would be only $1,500, or 30% of the value of the margin account. If the share price were to fall further, the investor would hold less than 30% of the shares. At this point, the investor would receive a margin call from the brokerage firm. The investor should deposit enough money into the account to hold at least 30% equity. A margin requirement is the percentage of margin-eligible securities that an investor must pay with their own cash. It can be divided into initial margin requirement and maintenance margin requirement. Under the Federal Reserve`s Regulation T, the initial margin requirement for stocks is 50% and the maintenance margin requirement is 30%, while for some stocks, higher requirements could apply to both. The broker does this because they have lent you $5,000 and want to mitigate the risk that you will default on the loan.

Federal Reserve regulations and the broker`s internal policies determine the initial margin and minimum percentages for maintenance. Many margin investors are familiar with the “routine” margin call, where the broker asks for additional funds when the client`s account equity falls below certain required values. Usually, the broker allows two to five days to answer the call. The broker`s calls are usually based on the value of the account at the close of the market, as various securities regulations require an end-of-day valuation of clients` accounts. The current “trade” for most brokers is 4.m.m. Eastern Time. The maintenance margin is used to protect brokerage firms from investors who default on their loans. Holding a buffer between the loan amount and the value of the account reduces the risk of the business. The risk to brokerage firms is higher when stock prices fall dramatically. The initial margin is the percentage of the purchase price of a security that must be backed by money or collateral when using a margin account. The current initial margin requirement set out in the Federal Reserve`s Regulation T is 50%.

However, this Regulation is only a minimum requirement where securities brokerage firms may set their initial margin requirement at more than 50 %. As with most loans, the margin agreement explains the terms of the margin account. For example, the agreement describes how interest on the loan is calculated, how you are responsible for repaying the loan, and how the securities you buy serve as collateral for the loan. Carefully review the agreement to determine what notice your business may need to give you before selling your securities to recover the money you borrow or making changes to the terms under which interest is calculated. In general, a business must notify a customer in writing for at least 30 days of any change in the method of calculating interest. An initial margin or initial margin requirement is the amount an investor must pay in cash for securities before the broker lends money to that investor to buy more securities. This loan gives the investor more purchasing power through leverage and offers the possibility of increasing returns (or worsening losses) depending on whether the stock gains (or decreases) in value. There are also more potential drawbacks to using margins. When the share price drops, the investor pays interest to the brokerage company and makes larger losses on the investment. The following is an example of how maintenance requirements work.

Let`s say you buy $16,000 worth of securities by borrowing $8,000 from your business and paying $8,000 in cash or securities. When the market value of the securities you buy drops to $12,000, the equity in your account drops to $4,000 ($12,000 – $8,000 = $4,000). If your business has a 25% maintenance requirement, you must have $3,000 in equity in your account (25% of $12,000 = $3,000). In this case, you will have enough equity, as the $4,000 equity in your account is greater than the $3,000 maintenance requirement. To open a margin account with a brokerage firm, an account holder must first deposit a certain amount of cash, securities or other collateral called an initial margin requirement. A margin account encourages investors, traders, and other market participants to use leverage to buy securities with a total value greater than the free cash balance on the account. A margin account is essentially a line of credit that charges interest on the outstanding margin balance. Under the Federal Reserve Board`s T regulation, you can borrow up to 50% of the purchase price of equity securities that can be purchased on margin. This is called the “initial margin”. Some companies require you to deposit more than 50% of the purchase price.

The following formula can be used to determine the purchasing power multiplier by taking into account the initial margin percentage: Did you know that margin accounts carry much more risk than cash accounts where you pay in full for the securities you buy? Do you know that you can lose more than the amount of money you originally invested in margin buying? Can you afford to lose more money than the amount you invested? Suppose an account holder wants to buy 1,000 shares of Facebook, Inc., listed at $200 per share. The total cost of this transaction in a cash balance account would be $200,000. However, if the account holder opens a margin account and deposits the initial margin requirement of 50% or $100,000, the total purchasing power increases to $200,000. In this case, the margin account has access to two-on-one leverage. The downside of using margin is that when the share price drops, large losses can rise rapidly. For example, suppose the stock you bought for $50 drops to $25. If you paid for the stock in full, you will lose 50% of your money (your $25 loss is 50% of your initial $50 investment). But if you bought on margin, you lose 100% (your $25 loss is 100% of your initial $25 investment), and you still have to pay the interest you owe on the loan.

Brokers, like other lenders, have policies and procedures in place to protect against market risks or impairment of securities guarantees, as well as credit risks when one or more investors are unable or unwilling to meet their financial obligations to the broker. Among the options available to them, they have the right to increase their margin requirements or choose not to open margin accounts. An initial margin requirement refers to the percentage of equity required when an investor opens a position. For example, if you have $5,000 and want to buy ABC shares that have an initial margin of 50%, the amount of ABC shares you can buy on margin is calculated as follows: If an investor holds securities purchased on margin to allow for some price fluctuation, the minimum margin requirement of firstrade will be lowered to 30% for most shares. . . .