Key Takeaways
- Minimum equity to avoid margin call.
- Typically 25-40% of position value.
- Triggers deposit or liquidation if breached.
What is Maintenance Margin?
Maintenance margin is the minimum equity percentage you must maintain in a margin account after opening a leveraged position to avoid a margin call or forced liquidation. It ensures you have enough skin in the game as market values fluctuate, protecting both you and your broker.
While initial margin refers to the upfront deposit required to open a position, maintenance margin is monitored continuously and typically ranges from 25% to 40% of the current market value. This concept is fundamental when trading with leverage or using a margin account.
Key Characteristics
Maintenance margin has distinct features that differentiate it from other margin requirements:
- Ongoing Requirement: Unlike initial margin, maintenance margin is a continuous minimum equity threshold you must sustain throughout the life of the trade.
- Protective Role: It prevents excessive losses by triggering a margin call if your equity falls below the set level.
- Variable Levels: Brokers often set maintenance margin between 25% and 40%, sometimes higher for volatile securities.
- Regulatory Compliance: Requirements vary by jurisdiction; for example, U.S. rules under SEC and FINRA often dictate minimum levels and enforcement.
- Applies to Various Assets: Maintenance margin rules extend beyond stocks to futures and other leveraged instruments.
How It Works
When you open a position with borrowed funds, you initially deposit an equity amount known as the initial margin. Afterward, the maintenance margin sets the minimum equity you must keep as prices fluctuate. If the market value of your holdings declines, your equity may drop below this threshold.
At that point, your broker issues a margin call requiring you to add funds or securities promptly. Failure to meet this call can result in forced liquidation of your positions to cover losses. Understanding how leverage amplifies both gains and risks is crucial, and selecting a broker from our best online brokers list can help you manage these risks effectively.
Examples and Use Cases
Maintenance margin plays a critical role in various trading scenarios, especially when dealing with volatile stocks or futures contracts.
- Stock Trading: Suppose you buy shares of Delta on margin with an initial 50% deposit. If the stock price falls significantly and your equity dips below the maintenance margin, your broker will require additional funds or sell shares to restore the minimum equity.
- Futures Contracts: Exchanges like CME set maintenance margins lower than initial margins but monitor them continuously to minimize risk exposure.
- Diversified Portfolios: Combining assets with different margin requirements, such as stocks and bonds, affects your overall maintenance margin obligation, requiring careful monitoring.
Important Considerations
Maintaining the required margin is essential to avoid margin calls and forced liquidation, which can magnify losses. Brokers may impose stricter house rules beyond regulatory minima, so staying informed about your broker’s policies is important.
Before trading on margin, review margin requirements carefully and consider risk management strategies. For low-cost, diversified exposure that may reduce margin-related risks, explore options like our best low-cost index funds guide.
Final Words
Maintenance margin sets the crucial equity floor to keep your leveraged positions open and avoid forced liquidation. Review your broker’s specific maintenance requirements regularly and adjust your positions or cash buffer accordingly to manage risk effectively.
Frequently Asked Questions
Maintenance margin is the minimum equity level, usually 25-40% of the total position value, that traders must keep in their margin account after opening a leveraged position to avoid a margin call or liquidation.
Initial margin is the upfront equity required to open a position, typically higher (like 50% in the U.S.), while maintenance margin is the ongoing minimum equity percentage traders must maintain after the position is opened.
If your equity drops below the maintenance margin level, your broker will issue a margin call, requiring you to deposit additional funds or securities within a set timeframe to avoid forced liquidation of your positions.
Brokers enforce maintenance margin to protect themselves and exchanges from excessive risk if the market value of securities declines, ensuring traders have enough equity to cover potential losses.
No, maintenance margin requirements vary by asset class; for example, U.S. brokers often require 25-40% for stocks, while futures exchanges set their own levels, which are generally lower but continuously monitored.
Typically, traders have 2-5 days to meet a margin call by depositing additional funds or securities, but for futures contracts, immediate action may be required to avoid liquidation.
A margin account is a brokerage account that allows borrowing to trade securities with leverage, while the maintenance margin is the minimum equity percentage that must be continuously maintained within that account to keep positions open.
