What Is a Maintenance Requirement for a Margin Account?

A maintenance requirement in an investment account refers to the minimum amount of equity an investor must maintain in a margin account after securities have been purchased. This requirement functions as a protective measure for both the investor and the brokerage firm. It establishes a baseline for the account’s value, ensuring sufficient collateral remains to cover borrowed funds.

Understanding this requirement helps investors manage the risks associated with borrowing money to buy securities. If the equity in an account falls below this specified level, it triggers specific actions designed to bring the account back into compliance.

What is a Margin Account

A margin account allows an investor to borrow money from a brokerage firm to purchase securities, distinguishing it from a cash account where only available funds can be used. This borrowed money, known as a margin loan, enables investors to control a larger position in the market than their cash balance alone would permit. The securities purchased serve as collateral for this loan.

The ability to buy on margin introduces leverage, which can amplify both gains and losses. Regulatory bodies, such as the Federal Reserve, set initial margin requirements through Regulation T. This regulation generally mandates that an investor deposit at least 50% of the purchase price of securities with their own funds, meaning an investor can borrow up to 50% of the security’s value for new purchases. While Regulation T sets a baseline, brokerage firms often impose higher initial requirements based on their internal risk assessments.

After the initial purchase, the maintenance requirement comes into play. This ongoing minimum equity level protects the brokerage firm from excessive losses if the value of the collateralized securities declines. If the market value of the securities falls, the investor’s equity in the account also decreases, potentially bringing it closer to or below the maintenance threshold. The maintenance requirement is a continuous safeguard, ensuring that the investor’s equity provides a sufficient buffer against the borrowed amount.

Calculating the Maintenance Requirement

The maintenance requirement is expressed as a percentage of the total market value of the securities held in a margin account. The Financial Industry Regulatory Authority (FINRA) mandates a minimum maintenance margin of 25% of the market value of securities. This is a regulatory floor, and individual brokerage firms often establish their own “house” maintenance requirements, which are frequently higher.

These firm-specific requirements can range from 30% to 50% or even higher. They depend on factors such as the volatility of the specific securities held, the investor’s overall risk profile, and the firm’s internal risk management policies. Brokerage firms retain the right to adjust these requirements at any time, even without prior notice, to manage their risk exposure.

To illustrate, consider an investor with $20,000 worth of securities purchased on margin. If the brokerage firm has a 30% maintenance requirement, the investor must maintain at least $6,000 in equity ($20,000 0.30) in the account. This equity represents the difference between the current market value of the securities and the amount borrowed from the broker. Should the market value of the securities decline, the investor’s equity will also decrease, bringing them closer to this $6,000 threshold.

The total maintenance requirement for an account with multiple positions is the sum of the individual requirements for each security. Investors must monitor their account’s equity level against the cumulative maintenance requirement to ensure compliance.

Understanding a Margin Call

A margin call is a formal demand from a brokerage firm for an investor to deposit additional funds or securities into their margin account. This demand occurs when the equity in the account falls below the maintenance requirement. The primary trigger for a margin call is a decline in the market value of the securities held on margin, which reduces the investor’s equity relative to the borrowed amount.

When the ratio of the investor’s equity to the total market value of the securities drops below the brokerage firm’s specified maintenance percentage, a margin call is issued. For instance, if an account’s equity falls to 20% when the maintenance requirement is 25%, a margin call will be issued to bring the equity back to or above the 25% threshold. Brokerage firms typically provide a limited timeframe, often a few business days, for the investor to meet the call. Failure to meet a margin call promptly can lead to severe consequences, including forced liquidation.

Forced liquidation means the brokerage firm can sell some or all of the investor’s securities in the account without prior consent or even notice. This action is taken to reduce the outstanding margin loan and bring the account’s equity back into compliance. Such liquidations can result in significant losses for the investor, especially if securities are sold at unfavorable market prices during a downturn.

Resolving a Margin Call

When an investor receives a margin call, several actions can be taken to bring the account equity back to the required level. One method is depositing additional cash into the margin account. This increases the account’s equity directly, helping to satisfy the call and restore the required percentage.

Alternatively, an investor can deposit additional marginable securities into the account. These securities, such as stocks or bonds, add to the total value of the collateral held by the brokerage firm. The market value of these newly deposited securities contributes to increasing the account’s equity, helping to meet the maintenance requirement.

Another strategy is to sell some of the existing securities held in the account. The proceeds from these sales are typically used to reduce the outstanding margin loan, which in turn increases the investor’s equity percentage in the account. While this action reduces the overall position, it can be an effective way to resolve a margin call by decreasing the borrowed amount.