When considering a margin loan, you need to determine how the use of margin fits your own investment philosophy. Given the associated risks, it is important that you fully understand the rules and requirements for trading securities on margin. If the equity of a margina account is less than the maintenance margin level, the brokerage will make a margin call to the investor. In a number of days – usually within three days, although there may be fewer in certain situations – the investor must deposit more cash or sell shares to compensate for some or all of the difference between the price of the security and the maintenance margin. But what if you borrowed an additional $5,000 margin and bought 200 shares of that stock at $50 for $10,000? A year later, when it was $30, your shares would be worth $6,000. What happens if you add to the mix? This time, you are using your $10,000 purchasing power to buy 200 shares of that stock at $50 — you use your $5,000 in cash and borrow the $5,000 on margina from your brokerage company. Suppose the maintenance margin is 25%. This means that the client must respect a net worth of 25% of the total share capital. This means that they must have a net capital of $50,000 × $0.25 – $12,500. So at what price would the investor receive a margin call? For the P share price, the share capital (in this example) is 1,000P. The initial margin requirement is the amount of guarantees needed to open a position.
Then, the necessary security until the position closes is the maintenance requirement. Maintenance requirements are the minimum amount of security required to keep the position open and are generally below the original requirement. This allows the price to move against the margin without forcing a margin call immediately after the initial transaction. If the total value of the security is covered by the maintenance margin requirement, the facility owner must mortgage additional collateral to restore its overall balance or exceed the initial margin requirement. However, for instruments considered to be particularly risky, regulators, the stock exchange or the broker may set the maintenance burden above normal or equal to the initial risk reduction requirement relative to the risk accepted by the trader. For futures and derivatives clearing accounts, futures traders can calculate a premium or margin multiplier for trading requirements. This is usually an additional 10% to 25%. The maintenance margin requirement uses the above variables to establish a report that investors must comply with in order to keep the account active.