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Maintenance margin refers to the equity that the investor is supposed to maintain in their margin accounts after making an investment. The regulatory bodies decide the maintenance margin for the investors. However, the brokerage firm can also set the minimum maintenance limit for the margin accounts. FINRA (Financial Industry Regulatory Authority) has set 25% of your total investment as the minimum limit each Margin Account investor has to hold. As mentioned before, the final maintenance level depends on the brokerage firm the investor works with. It can go up to 30-40 percent of the value of the stocks and other financial products you hold.
A margin account allows the trader to purchase securities using the amount loaned by the brokerage company. Usually, if the investor is working with a broker, they can request the broker to lend them margin funds that can be used for investments. Using the borrowed money, the investor can purchase Bonds, stocks, futures, options, and other investment instruments. However, the investor has to follow the rules set by the brokerage company and the regulatory bodies when it comes to using the borrowed money for investments.
Margin investment is developed by the regulatory bodies and federal government in order to protect the brokers and investors from risks. FINRA is the main regulator of margin accounts. In order to open the margin account, the investor has to deposit the initial margin, which is INR 1,47,251. They could add it to their account in either cash or securities. They can borrow additional funds from the brokers using their financial products and other investment instruments as Collateral. The broker can lend 50% of the value of the shares purchased.
The maintenance margin rules are designed to guarantee security to the brokers. Maintenance margin refers to the total securities held in the investor’s margin account minus the amount they have borrowed from the broker. Now, the investor has to apply the minimum maintenance requirement percentage to this amount to find out the minimum amount they need to hold in the margin account as long as they plan on using the borrowed money. Whether you are a regular trader or an inactive investor, you must meet this minimum maintenance requirement.
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For example, if the investor has purchased securities worth INR 7,36,256, they are supposed to hold at least INR 1,84,064 in their margin account. Note that the maintenance margin requirements can fluctuate with the changes in the price of the securities. If the value of the share decreases, the maintenance margin level drops. If we consider the above example, then a rise in the value of the stock by INR 3,68,128 will result in the increased maintenance limit (up to INR 2,76,096). It is important to note that the investor will be due a margin Call if they Fail to adhere to the maintenance margin requirements. The investor has the right to sell your existing securities and cease your account if you are unable to fulfill the Margin Call.