For other financial products, the initial margin and the maintenance margin vary. Exchanges or other regulatory bodies set minimum margin requirements, although some brokers may increase these margin requirements. This means that the margin may vary depending on the broker. The initial margin required for futures is usually much lower than for stocks. While equity investors need to raise 50% of the value of a trade, futures traders may only need to raise 10% or less. The broker requires the investor to deposit $5,000 because the amount required to reach the maintenance margin is calculated as follows: The disadvantage of using the margin is that, as the share price drops, large losses can increase rapidly. For example, suppose the stock you bought for $50 drops to $25. If you paid for the stock in full, you will lose 50% of your money (your $25 loss is 50% of your initial $50 investment). But if you bought on margin, you lose 100% (your $25 loss is 100% of your initial $25 investment), and you still have to pay the interest you owe on the loan.
As with most loans, the margin agreement explains the terms of the margin account. For example, the agreement describes how interest on the loan is calculated, how you are responsible for repaying the loan, and how the securities you buy serve as collateral for the loan. Carefully review the agreement to determine what notice your business may need to give you before selling your securities to recover the money you borrow or making changes to the terms under which interest is calculated. In general, a business must notify a customer in writing for at least 30 days of any change in the method of calculating interest. If an investor buys securities with margin funds and these securities increase in value beyond the interest rate applied to the funds, the investor will obtain a better overall return than if he had only bought securities with his own cash. This is the advantage of using margin funds. What happens if you don`t answer a margin call? Your brokerage firm may close positions in your portfolio and is not required to consult with you beforehand. In the worst case, it is possible for your brokerage company to sell all your shares, so you do not have shares but still owe money.
According to these rules, the client`s equity in the account cannot be less than 25% of the current market value of the securities in the account. Otherwise, the client may be asked to deposit more funds or securities to maintain equity at the 25% level (called margin call). Otherwise, the Company may liquidate the securities of the Client`s account in order to reduce the Equity of the Account to the required level. Obviously, the numbers and prices with margin calls depend on the percentage of margin maintenance and the actions involved. Keep in mind that high-margin investments in your portfolio provide security for your margin loan. Also keep in mind that although the value of these guarantees fluctuates depending on the market, the amount you have borrowed remains the same. If your shares fall to the point where they no longer meet the minimum capital requirements for your margin loan – typically 30% to 35%, depending on the particular securities you own and the brokerage firm2 – you will receive a margin call (also known as a maintenance call). In this case, your brokerage firm will ask you to immediately deposit more money or negotiable securities into your account to meet the minimum equity requirement. Investors who make an initial margin payment on a share may, from time to time, be required to provide the Broker with additional cash or securities if the share price falls (a „margin call“).
Some investors were shocked to learn that the brokerage firm has the right to sell its securities bought on margin – without notice and perhaps with a significant loss to the investor. If your broker sells your shares after the price collapses, you have missed the opportunity to make up for your losses as the market recovers. Each brokerage firm may define, under certain guidelines, which stocks, bonds and mutual funds qualify for margins. The list typically includes securities traded on major U.S. exchanges that sell for at least $5 per share, although some high-risk securities may be excluded. Also, keep in mind that you can`t borrow funds from retirement accounts or deposit accounts. A margin call occurs when the value of an investor`s margin account falls below the amount required by the broker. An investor`s margin account contains securities purchased with borrowed money (usually a combination of the investor`s own money and money borrowed from the investor`s broker). A margin call specifically refers to a broker`s requirement that an investor deposit additional money or securities into the account in order for it to be brought to the minimum value called the holding margin.
The above scenarios assume that there are no fees, but interest will be paid on the borrowed funds. If the transaction had taken a year and the interest rate was 10%, the client would have paid 10%*$2,500 or $250 in interest. Your actual profit is $5,000, minus $250 and commissions. Even if the client has lost money while trading, their loss will be increased by commissions of $250 plus. Buying shares on margin is only profitable if your shares increase enough to repay the loan with interest. But you could lose your capital and then some if your shares fall too much. However, if used wisely and carefully, a margin loan can be a valuable tool under the right circumstances. If the equity of a margin account falls below the maintenance margin level, the brokerage will make a margin call to the investor.
In a number of days – usually within three days, although this may be less in some situations – the investor must deposit more money or sell certain shares to compensate for all or part of the difference between the price of the security and the maintenance margin. If a margin call is not respected, a broker can close all open positions to bring the account back to the minimum value. You may be able to do this without the investor`s consent. This effectively means that the broker has the right to sell all the shares in the required quantities without informing the investor. In addition, the broker may also charge an investor a commission for these transactions. This investor is responsible for the losses incurred during this process. To open a margin account, your broker will have you sign a margin agreement. The margin agreement may be part of your general brokerage account opening agreement or a separate agreement.
The margin agreement states that you must comply with the margin requirements set by the Federal Reserve Board, FINRA, an applicable stock exchange, and the company in which you created your margin account. Be sure to carefully review the agreement before signing it. Margin accounts can be very risky and not suitable for everyone. Before opening a margin account, you need to understand the following: Few investors borrow at this extreme – the more you borrow, the more risk you take – but using the 50% figure as an example, it will be easier to see how the margin works. After purchasing shares on margin, FINRA rules require your brokerage firm to impose a „maintenance requirement“ on your margin account. .