What is maintenance margin?
The amount of money that has to be in your account to keep a leveraged transaction open is called the maintenance margin, also known as the variation margin. It ensures you always have enough cash to cover any running losses and finance the position’s current value.
A particular amount of money must be paid and held in your account to maintain an open leveraged position. For example, your deposit might need to be increased to keep the transaction if your situation begins to lose money. Your broker will request that you contribute extra funds to balance your account. An example of this is a margin call.
The essentials of maintenance margins
Before delving deeper into maintenance margins, let’s briefly discuss margin trading. It involves buying assets using the money you borrow from your broker. Margin trading enables individuals and organizations to purchase more stock in a firm than they could. Therefore, it is a method that is fundamentally speculative, and you may earn a lot of money with it. However, you must be very aware of the dangers. Due to the tremendous degree of leverage, it doesn’t go very well if something goes wrong. Therefore, margin trading should only be considered if you are entirely aware of the hazards.
A maintenance margin example
Say you wish to buy 100 shares of firm ABC, which are now priced at $500, to go long. The total value of your stake is $50,000 as a result. However, since you’re using leverage to trade, you need to make a 20% initial deposit. Therefore, your margin deposit is $10,000 ($50,000 multiplied by 20%).
When you make the deal, you have $10,000 in your account, sufficient to meet your margin need. However, you would be put on a margin call immediately if the amount of money in your account decreased due to your position losing money. This is because you need more resources to make up for your losses.
You need to top up your account to get your balance above $10,000 to maintain your position. Your maintenance margin is the sum you’d be required to deposit. For instance, you would have to deposit $200 if your account balance dropped to $9800.
However, your account would be subject to position termination if its capital dropped by 50% to $5000.
How can I keep from going over the maintenance margin?
You might bear in mind the following considerations to prevent receiving a margin call and then exceeding the maintenance margin:
By controlling the size of your position, you may keep leverage at a manageable level. On the other hand, a significant role concerning your account size means that even a slight price shift might cause significant percentage changes in the account value.
Make an effort to have more money in your account than the bare minimum. If a position calls for £100 in the margin, having double, treble, or more of that amount in the account might lessen the likelihood of receiving a margin call.
FINAL OVERVIEW
Why is there a maintenance margin?
Maintenance margin requirements aim to safeguard the trader and the broker from excessive losses, protecting the entire financial system. An agreement with a person on the other side of the transaction is referred to as a trade. Therefore, each partner must be able to fulfill their commitments and possess sufficient funds to offset any losses.