Understanding Initial Margin
When opening a margin account, investors must deposit cash or securities equal to the initial margin—a percentage of the security's purchase price. Federal Reserve Regulation T mandates a minimum 50% initial margin requirement, though brokers may enforce higher thresholds. [1]
Key Takeaways
- Initial margin represents the cash portion (typically 50%+) of an asset's purchase price when trading on margin.
- Brokerages and exchanges may set requirements above the Federal Reserve's minimum.
- Distinct from maintenance margin, which governs ongoing account equity levels.
How Initial Margin Works
Margin accounts enable leverage by allowing purchases exceeding account balances. Brokers lend funds against account-held securities as collateral, amplifying both gains and losses. Interest accrues daily on borrowed amounts.
⚠️ Note: If leveraged assets drop to zero, the investor must cover losses by depositing the full original value.
Futures Contracts & Initial Margin
Futures exchanges may require as little as 5–10% of contract value upfront. For example:
- A $100,000 crude oil futures contract might only need $5,000 initial margin (5%).
- This creates 20:1 leverage, but exchanges can adjust requirements during volatile markets.
Initial Margin vs. Maintenance Margin
| Criteria | Initial Margin | Maintenance Margin |
|---|---|---|
| Purpose | Entry requirement for trades | Ongoing account requirement |
| Regulation T | ≥50% of purchase price | ≥25% of account equity |
| Function | Limits borrowing capacity | Protects against margin calls |
Brokers often set higher maintenance margins for volatile securities.
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Example: Calculating Initial Margin
Scenario: Buying 1,000 Meta (META) shares at $200/share:
- Cash Account: Full $200,000 required.
- Margin Account: $100,000 deposit (50%) enables $200,000 position (2:1 leverage).
FAQs
Q: Can initial margin requirements change?
A: Yes—brokers may increase requirements beyond Fed minimums.
Q: How is maintenance margin different?
A: It’s the minimum equity to retain post-trade, whereas initial margin governs trade entry.
Q: What happens if I fall below maintenance margin?
A: You’ll face a margin call requiring additional funds or position liquidation.
References
Disclaimer: This content is educational and not investment advice.