What are Initial Margin and Maintenance Margin
Margin is the money borrowed from a brokerage firm to purchase stocks. It is the difference between the total value of securities held in an investor’s account and the loan amount from the broker. The brokerage firms borrow money to investors to buy investments and pay interest for the borrowed money. When an investor buys on margin, it means that he uses money borrowed from a broker to purchase securities. Let’s have a look at different aspects of margin – initial margin and maintenance margin.
The initial margin is the percentage of the purchase price that must be covered by the investor’s own money. There should be a minimum amount in your account as your own money. Initial margin applies in futures trading in both long or short a futures.
Initial margin is calculated based on a percentage of the total value covered under the futures contracts. This percentage is based on the futures market that you are trading.
Suppose a trader is looking to purchase 100 shares of Company ASD at RS. 200 per share, but the investor doesn’t have the needed RS. 20,000 to purchase the entire amount of those stocks. If the investor has established a margin account with the brokerage firm, they may acquire the stocks by only putting up a percentage of the total purchase price. This initial percentage is referred to as the “initial margin requirement.”
Initial Margin Example
Suppose you go long on the futures contracts for ASD stock trading at RS. 200 covering 100 shares.
Total value covered under futures contract = 200 x 100 = 20000
And if the initial margin is 50%
Initial margin required = 20000 x 50% = 10000
A margin account with a brokerage firm allows investors to acquire the 100 shares with RS. 10000. The brokerage firm covers the remaining RS. 10000.
The maintenance margin is referred to as the amount of equity the investor must maintain in the margin account. Maintenance Margin is the minimum amount of margin balance that a margin account holder needs to have in his/ her account to keep the futures position valid. It is the minimum amount of money which your broker or the exchange requires you to have in your account so that losses can be deducted from it. Maintenance margin is lesser than the initial margin. The maintenance margin protects brokerage firms from investors defaulting on their loans.