Margin Requirements

A Margin Requirement is the percentage of marginable securities that an investor must pay for with his/her own cash. It can be further broken down into Initial Margin Requirement and Maintenance Margin Requirement. According to Regulation T of the Federal Reserve Board, the Initial Margin requirement for stocks is 50%, and the Maintenance Margin Requirement is 25%, while higher requirements for both might apply for certain securities.

An Initial Margin Requirement refers to the percentage of equity required when an investor opens a position. For example, if you have $5,000 and would like to purchase stock ABC which has a 50% initial margin requirement, the amount of stock ABC you are eligible to buy on margin is calculated as follows:

• Buying power * 50% is less than or equal to $5,000.
• Buying power is less than or equal to $5,000 / 50% = $10,000
• You can purchase up to $10,000 worth of stock ABC using your margin buying power.

When an investor holds securities bought on margin, in order to allow some fluctuation in price, the minimum margin requirement at Firstrade for most stocks is lowered to 25%. This is called the Maintenance Margin Requirement. When the investor is unable to maintain the equity above the maintenance margin requirement, a margin call occurs.

For Example: You have $10,000 worth of securities bought using $5,000 in cash and $5,000 on margin. If the total value of your holding drops to $6,000 and the amount you borrowed on margin remains at $5,000, your equity will only be worth $1,000 ($1000/$6000=16.7%) which falls below the 25% minimum margin requirement.

An exception to the 25% maintenance margin requirement is when the investor’s account is concentrated. A Concentrated Account is formed when one single position is equal to or greater than 60% of the total marginable market value. Due to the higher risk of fluctuation, the maintenance margin requirement remains 50% when the account is concentrated.

For example: Following the example mentioned when introducing the initial margin requirement, the current price of stock ABC is $100. You now have 100 shares of stock ABC bought using $5,000 in cash and $5,000 on margin. If the price of stock ABC drops from $100 to $90 and the total value of your holding becomes $9,000, and the amount you borrowed from margin remains $5,000, your equity is now only $4,000, which is lower than the 50% minimum margin requirement for concentrated accounts.

Certain securities have higher margin requirements, in which case the initial and maintenance requirements will be the same higher rate. Please refer to the Special Margin Requirement chart to learn the details.