A maintenance margin is the minimum amount of equity which needs to be held in a margin account in order to keep the account open. Many investors buy and sell stocks on margin because this practice increases their buying power, but buying on margin can also expose people to significant risks. Maintenance margin requirements are designed to reduce risk and prevent losses for both sides of the deal: the investor and the brokerage firm.
When people buy on a margin, they put up part of the price of the security and are extended credit for the rest by their brokers. Typically, people need to provide a minimum margin before they trade, meaning that they deposit a base amount just to open a margin account. When they first buy securities, they are required to put up an initial margin, which is often 50% of the value. In order to keep the margin account open to keep buying and selling, it is necessary to maintain a maintenance margin.
Government regulators often set the maintenance margin at 25%, although individual brokers may opt to set the margin higher. This means that as the value of someone's securities falls, he or she may get a “margin call” from a broker, with the broker requesting more money to cover the maintenance margin. If an investor fails to respond to a margin call, the broker can choose to liquidate his or her securities to address the problem. Investors can also decide to get rid of their stocks at a loss rather than covering the margin, which can depress prices even further if numerous investors receive margin calls.
Maintenance margin requirements can vary, depending on the securities someone is buying and selling and the preference of the broker. The terms are clearly set out in the contract which is signed when someone opens an account, and investors can always contact their brokers to find out how large their maintenance margin is at any given time. People are also welcome to exceed the requirements, should they desire to do so.
Trading on margin can definitely make an investor's position stronger by allowing him or her more economic power. However, it can also be very dangerous, as radical shifts in values could leave investors scrambling to cover their margin. Brokers must weigh the desire to make margin accounts available to attract clients with the need to protect themselves from losses.