When you trade on "margin," you are borrowing money from your broker to buy a stock and using your investment as "collateral." Collateral is what a borrower gives to a creditor to guarantee repayment of a loan. Investors use margin so that they can own more stock without first fully paying for it.
This makes possible the potential for greater profit, but it also exposes investors to the potential for bigger losses. You are accountable for the money you borrow from the brokerage firm. You are also responsible for paying interest on the money you borrow.
The "margin" is the amount of assets you must have in your account as collateral for the loan.
The "initial margin requirement" is set by the Federal Reserve Board in Regulation T or "Reg T," for short.
Reg T states that you must have a margin of at least 50% of the price of the stock being purchased.
After the initial purchase, you are required to keep enough equity (usually stocks) in your account to cover no less than 25% of the value of the securities.
This is known as the "minimum maintenance requirement."
Keep in mind that 25% is the minimum maintenance requirement allowed by federal regulation.
- Many online brokerage firms have higher minimum maintenance requirements, such as 30% or 35%. And firms may set even higher requirements for particularly volatile stocks or for other reasons.
- Firms may also change margin requirements from day-to-day and stock-to-stock. Some firms may not allow you to buy certain stocks on margin.
- All firms charge margin interest, which may vary from firm to firm.
If the equity of the margin account falls below the 25% level, you must add the difference, using money or securities, to the account to bring it back up to or above the required minimum level. (currently uses a bar graph depiction)
You can sell any stocks in the account in order to get it to or above the required level.