The minimum initial requirement when purchasing 200 shares at $7.50 in a new account would be

An investor is considering the purchase of a small office building. The NOI is expected to be the following: Year 1, $232,000; Year 2, $242,000; Year 3, $252,000; Year 4, $262,000; Year 5, $272,000. T...

What Is Initial Margin?

Initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account. The current initial margin requirement set by the Federal Reserve Board’s Regulation T is 50%. However, this regulation is only a minimum requirement; some equity brokerage firms may set their initial margin requirement higher. 

Key Takeaways

• Initial margin is the percent of a purchase price that must be paid with cash when using a margin account.   
• Fed regulations currently require that the initial margin is set at a minimum of 50% of a security's purchase price. But brokerages and exchanges can set initial margin requirements higher than the Fed minimum.
• Initial margin requirements are different from maintenance margin requirements, which is the percent of equity that must be retained on an ongoing basis in the account.

Initial Margin

How Does Initial Margin Work?

To open a margin account at a brokerage firm, an account holder first needs to post a certain amount of cash, securities or other collateral, known as the initial margin requirement. A margin account encourages investors, traders, and other market participants to use leverage to purchase securities with a total value that's greater than the available cash balance in the account. A margin account is essentially a line of credit in which interest is charged on the outstanding margin balance.

Securities in the margin account are paid for with cash loaned to the account holder by the brokerage firm and are designated as collateral. This process allows for magnification of potential profits but also magnifies potential losses. In the extreme event that securities purchased in a margin account decline to zero value, the account holder needs to deposit the full initial value of the securities in cash or other liquid collateral to cover the loss.

Futures and initial margin 

For futures contracts, exchanges set initial margin requirements as low as 5% or 10% of the contract to be traded. For example, if a crude oil futures contract is quoted at $100,000, a futures account holder can enter a long position by posting only $5,000 initial margin, or 5% of the contract value. In other words, this initial margin requirement would give the account holder a 20x leverage factor.

During periods of high market volatility, futures exchanges may increase initial margin requirements to any level they deem appropriate, matching the power of equity brokerage firms to increase initial margin levels above those required by Fed regulation.

Initial Margin vs. Maintenance Margin 

Initial margin is distinct from maintenance margin. The two both relate to the amount of cash vs. the amount you can borrow when investing. However, the initial margin requirement is the amount of cash or collateral required to actually purchase securities; the Federal Reserve's Regulation T sets that sum at a minimum of at least 50% of the purchase. In other words, you can't borrow more than half the price of the investment.

In contrast, the maintenance margin is the amount of equity that must be kept in the margin account going forward. The minimum maintenance margin requirement set by Reg T is 25%. That means an investor must maintain enough cash or collateral value in the account to cover 25% of the securities owned. 

Maintenance margin helps ensure account holders maintain collateral in the account should the value of their securities fall. Some securities, especially volatile ones, will have higher margin requirements set by brokerages. 

Example of Initial Margin

As an example, assume an account holder wants to purchase 1,000 shares of Meta, Inc. (META), formerly Facebook, which is quoted at $200 per share. The total cost for this transaction in a cash balance account would be $200,000. However, if the account holder opens a margin account and deposits the 50% initial margin requirement, or $100,000, the total purchasing power will rise to $200,000. In this case, the margin account has access to two-to-one leverage.

What Is Minimum Margin?

Minimum margin is the initial amount investors are required to deposit into a margin account before trading on margin or selling short. Different margin trading accounts have their own minimum margins, though regulations establish the bare minimum. A margin account allows an investor to buy securities long or sell securities short on a line of credit extended to the investor by the broker.

The investor must make an initial deposit into the account to cover a certain percentage of the value of the securities the investor wishes to buy long or sell short. That minimum value must be maintained in the account while the long or short position is open.

Key Takeaways

• Minimum margin is the initial amount required to be deposited into a margin account before trading on margin or selling short. 
• Investors must make an initial deposit to cover a certain percentage of the value of the securities that are bought long or sold short, and that minimum value must be maintained while the position is open. 
• When you buy on margin, there are key levels—as governed by the Federal Reserve Board's Regulation T—that must be maintained throughout the life of a trade. 
• The New York Stock Exchange (NYSE) and Financial Industry Regulatory Authority (FINRA) require investors to deposit a minimum of $2,000 in cash or securities to open a margin account, and some brokerages may require you to deposit more.

For example, the New York Stock Exchange (NYSE) and Financial Industry Regulatory Authority (FINRA) require investors to deposit a minimum of $2,000 in cash or securities to open a margin account. Keep in mind that this amount is only a minimum—some brokerages may require you to deposit more than $2,000.

Understanding Minimum Margin

When an investor buys on margin, there are key levels—as governed by the Federal Reserve Board's Regulation T—that must be maintained throughout the life of a trade.

The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call.

Example of Minimum Margin

For example, if Bob wishes to trade on margin to buy shares of ABC stock, he will likely need to make sure he has at least 25% of the value of the purchase price of ABC stock in his margin account.

He can borrow the rest of the purchase price from the broker. If Bob used other securities in his account as the collateral, he will have to watch the value of those securities in his account. If the market falls and the value of the other securities in his account suffers, he could be hit with a margin call, which would require him to deposit more money into his margin account.

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