Margin (Margin Requirement)

Definition

The term margin refers to the minimum level of assets required to support an investment position.  When an investor buys securities on margin, they are funding a portion of the purchase price with funds borrowed from a broker.

Explanation

When buying securities, it is possible for the investor to borrow funds from a brokerage firm to pay for a portion of the purchase price.  The investor's margin, or margin requirement, represents the funds the trader must provide to support their investment position.  Generally, margin falls into one of two broad categories:

  • Initial Margin:  while there are several standards, Regulation T of the Federal Reserve Board governs margin requirements and states the initial margin for stock is 50%.  This means the investor must provide 50% of the funds used to purchase the stock.
  • Maintenance Margin:  in the event the price of the securities falls, maintenance margin becomes the minimum margin provided by the investor.  If the investor is not able to maintain their equity in the investment above the maintenance margin threshold, a margin call will occur.  Regulation T of the Federal Board established a threshold of 30% as the maintenance requirement for stock purchased on margin.

Related Terms

maintenance margin, initial margin, lambda, kappa, out-of-the-money, deep out-of-the-money, near-the-money