Maintenance Margin

What Is Maintenance Margin?

Maintenance margin is the lowest level of equity that must remain in a margin account after an investor has bought securities using borrowed funds from a broker. Equity is the current market value of the securities in the account minus the amount the investor owes the broker. If the equity falls below the required percentage, the account is considered under-margined, and the investor must take corrective action.

How It Works

When an investor buys on margin, the broker lends part of the purchase price and holds the securities as collateral. Because the value of those securities can move up or down, the broker needs a cushion to protect its loan. Maintenance margin sets that cushion. Regulators and exchanges set minimum maintenance requirements, and brokers are often allowed to set stricter ones.

If the market value of the holdings drops enough that equity falls below the maintenance level, the broker issues a margin call. The investor is then typically required to deposit more cash or marginable securities, or to sell some holdings, to bring equity back above the required level. Brokers may also sell positions without prior notice if the call is not met.

Example

Suppose an investor buys $10,000 of stock, paying $6,000 of their own money and borrowing $4,000 from the broker. The equity starts at $6,000. If the maintenance requirement is 25 percent of the market value, the investor must keep equity of at least 25 percent of the current value of the holdings.

If the stock falls to $7,000, the loan stays at $4,000 and equity drops to $3,000. Equity is now about 43 percent of the value, which is still above the requirement. If the stock falls further to $5,000, equity becomes $1,000, or 20 percent of the value, which is below 25 percent. A margin call would be issued.

Why It Matters to Investors

Maintenance margin shows how leverage magnifies both gains and losses. Borrowing lets an investor control more shares, but it also means a smaller price decline can wipe out a large share of their own capital. Investors who use margin should understand the maintenance requirement at their broker, track how close their equity is to it, and know that a forced sale during a downturn can lock in losses. The rules are also related to the initial margin requirement, which governs how much equity must be present when a purchase is first made.