Maintenance Margin
Candlefocus EditorThe maintenance margin is commonly set by Financial Industry Regulatory Authority (FINRA) at 25% of the total value of the securities held in a margin account. This requirement applies to any investor that is trading in a margin account. For instance, if an investor purchases $50,000 worth of stock, then the investor must maintain a minimum of $12,500 of equity in the account.
If the value of the equity in the margin account drops lower than this level, then the brokerage firm will issue a margin call. This is essentially a demand from the brokerage firm that the investor provide additional funds to the margin account in order to meet the minimum maintenance margin requirements.
The purpose of the requirement is not to prevent growth, but to protect the brokerage firm and the investor from overextending themselves. If a position loses value as the market moves against the investor, then a margin liquidation will prevent the investor from sustaining a catastrophic loss.
Ultimately, the maintenance margin serves as an important risk management tool for investors. By maintaining the minimum equity in their margin account, investors are better able to manage the risk of taking on too much leverage and thus reducing their chances of suffering a significant financial loss.