Introduction
Maintenance margin is defined as the lowest amount of equities that investors are mandated to keep in their respective margin accounts after the purchase is made. It differs across stock exchanges and is governed by the regulations of the country’s market watchdog.
Breaking Down Maintenance Margin
Despite the presence of the guidelines set by the regulatory authorities on the maintenance margin, several broking firms may require investors to maintain 30% to 40% of the total value of equities in their account. The maintenance margin is also referred to as the maintenance requirement or minimum maintenance.
Margin accounts are those accounts that are maintained with the broking firms, which lets investors purchase securities, such as shares, options, and bonds through the money they get by availing a loan from their broker. All margin accounts are maintained as per the regulations of the market regulator, and maintaining the minimum margin is one of the several requirements.
Maintenance Margin and Margin Accounts
Broking firms and investors have to sign a contract or agreement prior to opening margin accounts. As per the terms and conditions of the deal and the guidelines of the country’s market regulator (in India, it is the Securities and Exchange Board of India), the investors are needed to maintain a certain amount (which is referred to as the minimum margin) in their margin account before they can start trading through that account.
In case the equity in margin accounts go below the minimum maintenance, then the broking firms would issue a margin call. Investors on receiving the margin call will have to deposit the deficient amount in order to meet the minimum margin requirement. Until that is done, they cannot trade on that account.
