Suppose an account holder wants to buy 1,000 shares of Facebook, Inc., listed at $200 per share. The total cost of this transaction in a cash balance account would be $200,000. However, if the account holder opens a margin account and deposits the initial margin requirement of 50% or $100,000, the total purchasing power increases to $200,000. In this case, the margin account has access to two-on-one leverage. For futures contracts, exchanges set the initial margin requirements at 5% or 10% of the contract to be traded. For example, if a crude oil futures contract is quoted at $100,000, a term account holder can take a long position with only an initial margin of $5,000, or 5% of the contract value. In other words, this initial margin requirement would give the account holder 20 times the leverage. In accordance with FINRA Rule 4210(g), a member must provide clients with a special written statement describing the nature and risks of the portfolio margin no later than the date of the first transaction in a portfolio margin account. Purchasing power * 50% >> is less than or equal to $5,000. >> purchasing power >> is less than or equal to $5,000 / 50% = $10,000 >> you can buy ABC shares worth up to $10,000 with your purchasing power on margin. There are also more potential drawbacks to using margins. When the share price drops, the investor pays interest to the brokerage company and makes larger losses on the investment. The forward margin generally represents a lower percentage of the notional value of the contract, typically 3-12% per futures contract, compared to up to 50% of the face value of the securities purchased on margin.
The initial margin is the percentage of the purchase price of a security that must be backed by money or collateral when using a margin account. The current initial margin requirement set out in the Federal Reserve`s Regulation T is 50%. However, this regulation is only a minimum requirement when securities brokerage firms can set their initial margin requirement at more than 50%. This initial loan amount, as a percentage of the investment amount, is called the initial margin. So if a broker has an initial margin requirement of 50%, it means that you need to pay 50% of the total investment before the lender allows you to borrow the other half. An initial margin or initial margin requirement is the amount an investor must pay in cash for securities before the broker lends money to that investor to buy more securities. This loan gives the investor more purchasing power through leverage and offers the possibility of increasing returns (or worsening losses) depending on whether the stock gains (or decreases) in value. When your account balance falls below the maintenance margin level, some things can happen: A margin requirement is the percentage of high-margin securities that an investor has to pay with their own money. It can be divided into initial margin requirement and maintenance margin requirement. Under the Federal Reserve`s Regulation T, the initial margin requirement for stocks is 50% and the maintenance margin requirement is 30%, while for some stocks, higher requirements could apply to both. As markets move rapidly and daily price movements become more volatile, market conditions and clearing house margin methodology may result in higher margin requirements to account for increased risk. The broker does this because they have lent you $5,000 and want to mitigate the risk that you will default on the loan.
Federal Reserve regulations and the broker`s internal policies determine the initial margin and minimum percentages for maintenance. According to these rules, the client`s equity in the account cannot be less than 25% of the current market value of the securities in the account. Otherwise, the client may be asked to deposit more funds or securities to maintain equity at the 25% level (called margin call). Otherwise, the company may liquidate the securities of the client`s account to bring the equity of the account to the required level. .