What Is Initial Margin?
Let me explain initial margin to you directly: it's the percentage of a security's purchase price that you must cover with cash or collateral when you're using a margin account. The Federal Reserve Board's Regulation T sets the current minimum at 50%. Remember, this is just the baseline; your brokerage might demand more than that.
Key Takeaways
Here's what you need to grasp: initial margin is the cash percentage you pay upfront in a margin account for a purchase. Federal rules require at least 50% of the security's price, but brokerages and exchanges can go higher. Don't confuse it with maintenance margin, which is about keeping a certain equity level ongoing in your account.
How Does Initial Margin Work?
When you open a margin account with a brokerage, you start by posting cash, securities, or other collateral as the initial margin. This setup lets you use leverage to buy securities worth more than your available cash. Essentially, it's a line of credit from the brokerage, and they'll charge interest on what you borrow.
The securities you buy serve as collateral for that loan. This can boost your profits if things go well, but it also ramps up losses. In the worst case, if your securities drop to zero value, you'll have to deposit the full initial amount in cash or liquid assets to cover it.
Futures and Initial Margin
For futures contracts, exchanges often set initial margins at 5% or 10% of the contract value. Take a crude oil futures contract at $100,000; you could enter a long position with just $5,000 initial margin, giving you 20x leverage.
In volatile markets, exchanges might raise these requirements as they see fit, just like brokerages can exceed Fed minimums for equities.
Initial Margin vs. Maintenance Margin
You should know the difference: both involve cash versus borrowing in investments, but initial margin is what you need to put up to make the purchase— at least 50% per Regulation T, meaning you can't borrow more than half.
Maintenance margin, on the other hand, is the equity you must keep in the account afterward, with a Reg T minimum of 25%. This ensures you have collateral if security values drop, and volatile assets might have even higher requirements from brokerages.
Example of Initial Margin
Suppose you want to buy 1,000 shares of Meta, Inc. (META) at $200 each. In a cash account, that costs you $200,000 outright. But with a margin account and 50% initial margin, you deposit $100,000 and get $200,000 in purchasing power— that's 2:1 leverage right there.
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