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A margin requirement is defined as the minimum equity sum that investors must keep in their margin account preceding a trading transaction.
Margin requirements may be referred to as maintenance margin, minimum maintenance, or maintenance requirement. This is a requirement for broker trading in any asset class.
In terms of equities, the New York Stock Exchange (NYSE) and Financial Industry Regulatory Authority (FINRA) have a fixed margin requirement of 25% of the sum value of the securities present in a margin account.
While 25% is the minimum industry requirement, trading brokerages sometimes require between 30% to 40% of the total securities value as a margin requirement as a way to reduce the risk of an investor potentially defaulting on the loan.
Why Are Margin Requirements Important?
Ex:) A trader possesses a margin account equity sum of $5,000, which means the trader must maintain at least $1,250 in their margin account.
Should the trader’s equity appreciate up to $7,500, then the trader’s margin requirements increase from $1,250 to $1,875.
However, should a trader’s equity account fall below margin requirements set forth by a broker, that trader will receive what is known as a margin call, which is a request to deposit more or sell of pre-existing assets to fulfill margin requirements.
Margin requirements exist and are heavily regulated by the FINRA, NYSE, and the Federal Reserve Board due to the potential of margin trading able to incur astronomical gains along with immense losses.
Disturbances in the securities and global financial market are possible as a result of catastrophic losses through margin trading.
This is why margin trading is firmly regulated and the reason behind some brokerages raising their minimum margin requirements.