Minimum Margin

Minimum margin is the initial amount required to be deposited into a margin account before trading on margin or selling short. A margin account allows an investor to buy securities long or sell securities short on a line of credit extended to the investor by the broker. The investor must make an initial deposit into the account to cover a certain percentage of the value of the securities the investor wishes to buy long or sell short. That minimum value must be maintained while the long or short position is open. For example, the NYSE and the NASD require investors to deposit a minimum of $2,000 in cash or securities to open a margin account. Keep in mind that this amount is only a minimum — some brokerages may require you to deposit more than $2,000.

When you buy on margin, there are key levels — as governed by the Federal Reserve Board's Regulation T — that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call.

For example, if Bob wishes to trade on margin to buy shares of ABC stock, he will likely need to make sure he has at least 25% of the value of the purchase price of ABC stock in his margin account. He can borrow the rest of the purchase price from the broker. If Bob used other securities in his account as the collateral, he would have to watch the value of those securities in his account. If the market falls and the value of the other securities in his account suffers, he could be hit with a margin call which would require him to deposit more money into his margin account.