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Investors must abide by specific margin restrictions known as initial and maintenance margins when trading on margin. Both conditions are similar in that the investor must have the amount of money in their account to start or hold a position with a margin loan from the broker. The primary distinction between the two is that while the maintenance margin is the sum required to keep a position open, the initial margin is the sum needed to open a position.
Investors interested in margin trading should be aware of the parallels and divergences between initial and maintenance margins. Additionally, understanding maintenance margin calculation may protect investors from a margin call or other unfavorable events.
SIMILARITIES
Both initial margin and maintenance margin are utilized as deposits to protect against future losses in a margin account, which is how they are comparable. The two margin requirements are established using the account’s assets’ values.
Additionally, based on the volatility of a stock, a client’s financial status, and other circumstances, an exchange or brokerage business may increase or decrease the initial margin and maintenance margin.
DIFFERENCES
The initial margin is the sum of money or security that a buyer or seller of an item on margin must deposit with a broker.
On the other hand, the maintenance margin is the minimal level of equity that an investor must hold in their account to preserve the account’s open status and prevent a margin call.
The initial margin, often higher than the maintenance margin, is another distinction between the two.
Why are initial and maintenance margins different?
The difference between FINRA’s minimum maintenance margin requirement of 25% and the Federal Reserve Board’s Regulation T’s requirement of a minimum initial margin of 50% explains why the initial margin is larger.
Another distinction between the two is the process of requirements.
Here is the crucial distinction between the two when it comes to requirements:
Initial margin (abbreviated as “IM”) is a percentage of the nominal contract value and refers to the initial deposit needed when an investor establishes a position in a derivative instrument.
The initial margin needs to rise directly to the underlying asset’s volatility.
According to authorized margin models that are based on the market’s regulatory requirements, the amount for the first margin need is determined. The volatility of the underlying asset of the derivative instrument being covered largely determines the initial margin required.
In a maintenance margin, the investor will receive a margin call from the broker asking her to deposit more money to maintain her investment if she cannot meet the maintenance margin requirements. In addition, the broker may close her positions if she needs to give more maintenance margins.
FINAL INSIGHT
The maintenance margin is the proportioned percentage of the investor’s total investment that must remain in their trading account and is less than the initial margin to avoid a margin call, which is a request from their broker that they either deposit more money into their account or sell off enough of their holdings to cover the margin call.
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