Initial Margin

What Is Initial Margin?

Initial margin is the amount of money or collateral an investor must deposit before opening a leveraged position, such as buying stock with borrowed funds or entering a futures contract. It works as a good-faith deposit that shows the investor can absorb some of the potential losses on the trade. It is expressed either as a percentage of the position's value or as a set dollar amount, depending on the market and the firm handling the trade.

How It Works

When an investor buys securities on margin, the broker lends part of the purchase price, and the initial margin is the portion the investor must fund with their own cash or eligible securities. In the United States, Federal Reserve rules under Regulation T have generally required that a substantial share of a stock purchase, historically about half, be paid with the investor's own funds. Brokers may set stricter requirements for certain securities.

Futures work differently. Initial margin is not a down payment on the contract's full value. It is a performance bond that each side posts to the exchange's clearinghouse. Exchanges set these amounts and typically raise them when price volatility increases.

Once a position is open, the account must keep a minimum level of equity, known as maintenance margin. If equity falls below that level, the investor may receive a margin call.

Example

Consider a hypothetical case. An investor wants to buy $10,000 of stock with a 50% initial margin requirement. They deposit $5,000 of their own funds, and the broker lends the other $5,000. If the stock falls 10%, the position is worth $9,000, a $1,000 loss. That loss equals 20% of the investor's $5,000 deposit. Gains are magnified in the same way, which is why initial margin is closely tied to leverage. This example is for illustration only.

Why It Matters

Initial margin limits how much an investor can borrow or commit relative to their cash, which reduces risk for brokers and clearinghouses. For individual investors, it determines how much capital is needed to open a leveraged position and how much cushion exists before losses trigger further requirements. Understanding it helps explain why a trade may be restricted or why additional funds may be requested.