What it means
When an investor buys securities on margin, the broker lends part of the purchase price and holds the securities as collateral. The investor's equity is the market value of the holdings minus the loan, and that equity is the cushion protecting the broker if prices fall.
Two thresholds apply. Initial margin is the proportion of your own money required at the moment of purchase, often 50% in equity markets, while maintenance margin is the lower level you must stay above afterwards, commonly around 25% to 30%.
Brokers frequently set house requirements above the regulatory floor, especially on volatile or concentrated positions. The consequence of breaching the threshold is a margin call, which typically has to be met within a day or two.
If the investor cannot pay, the broker sells positions without needing permission, and does so at whatever price the market offers on that day. The commercial danger is that margin calls arrive at exactly the wrong moment.
Prices fall, the call lands, forced selling adds to the pressure and the investor crystallises a loss at the bottom rather than riding the position back up. The same idea appears outside share dealing.
Futures and derivatives accounts use variation margin that is settled daily, and corporate borrowers meet a similar structure through loan-to-value covenants on asset-backed facilities.
In practice
Real-world examples.
Example
A private investor holds a concentrated position in one listed retailer bought on margin. A profit warning knocks 22% off the share price overnight and the account falls below the maintenance requirement. She deposits cash the same morning rather than have the broker sell into a falling market.
Example
A family office running a leveraged bond portfolio models its maintenance margin headroom against a 100 basis point rise in yields. The test shows a call would arrive with rates only 60 basis points higher, so the office reduces borrowing before the next central bank meeting.
Example
A commodity trading firm posts variation margin daily on natural gas futures. A cold snap moves prices sharply and the clearing broker calls for $1.4 million by 9am. The treasury team keeps a standing credit line specifically for this, because margin calls will not wait for an invoice cycle.
Think of it
“Maintenance margin is the minimum you must keep-fall below and you'll get a margin call.
Formula
Calculation
Equity = Market value of securities - Margin loan
Margin call is triggered when: Equity / Market value < Maintenance margin percentage
Price at which a call is triggered: Market value = Margin loan / (1 - Maintenance margin percentage)
Worked example. An investor buys $60,000 of shares using $30,000 of her own cash and a $30,000 margin loan, meeting a 50% initial margin requirement. Her broker sets the maintenance margin at 30%.
The trigger point is $30,000 / (1 - 0.30) = $30,000 / 0.70 = $42,857. Once the holding is worth less than about $42,857, the account breaches the requirement.
Suppose the shares fall to $40,000. Equity is $40,000 - $30,000 = $10,000, which is $10,000 / $40,000 = 25% of market value and below the 30% threshold. The required equity at that price is 0.30 x $40,000 = $12,000, so the margin call is for $12,000 - $10,000 = $2,000. She can deposit $2,000 in cash, or sell shares and repay part of the loan, or the broker will sell for her.Case study
Seen in the real world.
Larkspur Capital is an illustrative fictional boutique investment firm used to show how maintenance margin behaves under stress. It ran a $12 million equity portfolio funded with $4 million of borrowing, comfortably above its broker's 30% maintenance requirement at the start of the year.
A sector-wide sell-off cut the portfolio's value by 28% over three weeks. Equity fell towards the threshold, and the broker also raised the house requirement on two of the firm's largest holdings from 30% to 45% because volatility had spiked. Both the numerator and the requirement moved against the firm at once.
Larkspur met the call by selling its most liquid holdings, which were also its best performers, because the illiquid positions could not be sold quickly at a sensible price. In this fictional example the firm survived, but it learned to run a liquidity buffer sized for a simultaneous price fall and requirement increase rather than for either alone.
Watch out
Common mistakes.
- Assuming the maintenance requirement is fixed. Brokers can raise house requirements at short notice, particularly on volatile or heavily concentrated positions, and they usually do so precisely when markets are falling.
- Confusing initial margin with maintenance margin. Initial margin applies once at purchase, while maintenance margin is an ongoing test that has to be passed every day the position is held.
- Planning to meet a call by selling the position. Forced selling in a falling market locks in the loss and can leave the account short if the price gaps below the level assumed.
Questions
People also ask.
What happens if a margin call is not met?
The broker liquidates positions at its own discretion, chooses which holdings to sell and is not obliged to obtain the best price the investor might have achieved.
Does maintenance margin apply to cash accounts?
No, it only applies where borrowing or derivative exposure is involved, since it exists to protect the lender against the value of the collateral falling.
Is there a business equivalent outside investing?
Yes, loan-to-value covenants on property and asset-backed lending work in much the same way, requiring the borrower to top up or repay when the collateral value falls.
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