What is Maintenance Margin?
The Maintenance Margin, or “variation margin,” is the minimum amount of equity that must be maintained in a margin account before a margin call is issued due to the account value not sufficiently meeting the minimum threshold.
- What is the definition of a maintenance margin?
- What is the purpose of the maintenance margin for brokerages?
- What is the difference between the initial margin and the maintenance margin?
- What formula calculates the minimum account value that abides by the maintenance margin?
Table of Contents
Maintenance Margin Formula
In the context of margin accounts, the term “maintenance margin” refers to the minimum amount of funds that must be available for a margin trade to remain open.
Leveraged trades are allowed for margin accounts, where the account holder can purchase securities such as stocks, bonds, or options with funds borrowed from the brokerage.
In effect, the total dollar amount of investments made can be greater than the account balance.
Margin accounts enable investors to trade with a percentage of the purchase price covered by a brokerage loan.
As part of being able to borrow cash and trade on margin, the investor is obligated to maintain a certain amount of funds in their margin account — which is the maintenance margin.
FINRA Margin Requirements
Financial Industry Regulatory Authority (FINRA) has set the minimum margin requirements for leveraged accounts at a maintenance margin at 25% of the total value of securities in a margin account.
FINRA Margin Requirement (Source: FINRA)
At all times, investors must abide by the maintenance margin’s minimum equity requirement by holding enough funds in their margin account following a loan-funded purchase.
Nonetheless, different brokerage firms can set their own requirements, with certain brokerages having more stringent maintenance margins to further protect against losses.
In general, the greater the uncertainty and volatility, the higher the requirements that are usually set.
Investing in securities on margin is conceptually very similar to purchasing them with a loan – the investor uses borrowed capital from a broker and pays interest on the loan.
The difference is that the securities themselves act as the collateral in such a loan agreement.
Maintenance Margin vs Initial Margin
There are two types of margins necessary for leveraged trading.
- Initial Margin: Often called the deposit margin, the initial margin is the amount needed to open a new position, i.e. the percentage of the purchase price that must be covered by the investor’s own money (~50% of the needed funds for stocks)
- Maintenance Margin: The maintenance margin, to reiterate, is the minimum amount of equity that must be maintained in the margin account post-purchase to keep to position open.
Maintenance Margin Example Calculation
Suppose that an investor wants to purchase 240 shares in a company at $100 per share, but the investor has insufficient funds to purchase all those shares.
By utilizing a margin account, the investor can purchase the entire amount of shares thanks to a loan.
The deposit of a pre-determined percentage of the total trade price must be made along with financing fees, i.e. the starting deposit is the initial margin requirement.
- If we assume that the initial maintenance margin requirement is 50% of the purchase price of the trade, the investor must maintain a balance of half of the purchase amount in the margin account.
- If the maintenance margin is set at 25% of the total value of the securities in a margin account — per FINRA requirements — the investor will be allowed to keep the positions open as long as the equity does not fall below the 25% maintenance margin.
But if the equity declines below the maintenance margin, the investor can be forced to liquidate his/her positions until the threshold is adequately met.
Maintenance Margin Account Value Formula
The formula to calculate the minimum margin account value where the maintenance margin is still met is as follows.
Margin Account Value Formula
- Margin Account Value = Margin Loan / (1 – Maintenance Margin)
Margin Account Value Calculator – Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Margin Account Value Example Calculation
For example, let’s say that an investor deposits $12,000 into a margin account with $12,000 borrowed as a margin loan – in such a case, $24,000 worth of stocks can be purchased.
If the brokerage’s maintenance margin is 25%, the formula for calculating the account balance that triggers the margin call is as follows:
- Margin Account Value = ($12,000 Margin Loan) / (1 – 0.25 Maintenance Margin %)
- Margin Account Value = $16,000
So if the investor’s margin account dips below $16,000, they would receive a margin call.