Maintenance margin is the minimum amount of equity an investor must hold in their margin account after purchasing an asset.
How maintenance margin works
When Elephants trade on margin, they borrow money from a broker to buy securities. The broker requires a minimum account balance to mitigate the financial risk of the asset’s value falling. This minimum balance is the maintenance margin. It is expressed as a percentage of the total market value of the securities in the account.
The exact percentage required varies by jurisdiction and individual broker policies. In the United States, the Financial Industry Regulatory Authority requires a baseline maintenance margin of 25% for equities. Many brokerage firms choose to set their own requirements higher than this regulatory minimum, generally between 30% and 40%. In other international markets, regional financial regulators set their own baseline percentages based on local laws.
If the equity in the account drops below this required percentage due to market fluctuations, the broker issues a margin call. A margin call requires the investor to deposit additional cash or sell assets to bring the equity back above the maintenance threshold. If the investor does not meet this requirement, the broker has the right to liquidate positions in the account without prior approval to cover the financial shortfall.
Example
An Elephant decides to buy shares in a peanut distribution company. They purchase $10,000 worth of stock using $5,000 of their own cash and $5,000 borrowed from their broker. The broker has a maintenance margin requirement of 30%. At the time of purchase, the equity is $5,000, which is 50% of the total value and well above the requirement.
Over the next month, a bad harvest causes the total stock value to drop to $6,000. The borrowed amount remains $5,000, meaning the Elephant’s equity is now only $1,000. This $1,000 represents 16.6% of the new $6,000 total market value. Because 16.6% is below the broker’s 30% maintenance margin requirement, the broker issues a margin call. The Elephant must deposit enough cash or sell shares to restore the equity to at least $1,800, which is 30% of the current $6,000 market value.