Maintenance margin

DEFINITION of Maintenance margin

Maintenance margin represents the amount that must be available in funds to be able to keep a margin trade open.

WHAT IT IS IN ESSENCE

It is also the variation margin. This is the minimum account value an investor has to maintain to continue holding one or more futures contracts. The dollar value for the minimum account value for an investor to continue holding one or more futures contracts.

The dollar value for maintenance margin varies by the specific commodity or financial instrument. An account that falls below the combined maintenance margin for all positions in the account will receive a margin call and be subject to full or partial liquidation.

HOW TO USE

The maintenance margin is one of two types of margin necessary to make a leveraged trade. The other is your deposit margin, which is the amount necessary to open a new position.  

To keep a leveraged position open, a certain amount of funds must be paid and kept in your account. The minimum required level of margin is 25% of the total market value of the securities in the margin account.

If your position starts to make a loss, then your deposit may no longer be enough to keep the trade open. In this case, your broker will ask you to increase the funding in your account. This is called a margin call.

Margin accounts allow investors to make investments with their brokers’ money. They act as leverage and can thus magnify gains.

They can also magnify losses, and in some cases, a brokerage can sell an investor’s securities without notification or even sue if the investor does not fulfill a margin call.

For these reasons, margin accounts are generally for more advanced investors who understand and can handle the risks.

Example:

A margin account is a loan from a brokerage firm. The loan proceeds that are necessary to make an investment.

Put yourselves in this situation, you want to buy 2,000 shares of Company XYZ for $7 per share but don’t have the $14,000 necessary to do so, you only have $7,000.

If you buy the shares on margin, you essentially borrow the other half of the money from the brokerage and collateralize a loan with the Company XYZ shares.

This original loan amount as a percentage of the investment amount is called the initial margin.

If the value of the Company XYZ shares drops past a certain point, say 25% of the original $14,000 value or $1.75 per share; this point is the maintenance margin. In such a case, the brokerage firm may make a margin call. Meaning that within a few days you must deposit more cash.

Or sell some of the shares to counterbalance all or part of the difference between the actual stock price and the maintenance margin.