This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Margin requirements are one of the most important concepts a stock trader can understand, and the margin requirements determine how much equity the trader must deposit to open and maintain a leveraged position. The margin requirements depend on the underlying asset, the type of trader, and the market conditions.
What margin requirements are
The margin requirements are the rules that determine the minimum equity the trader must keep in the account. The initial margin is the deposit required to open the position, and the maintenance margin is the minimum equity required to keep the position open. The initial margin and the maintenance margin are the two main margin requirements, and the two margins are set by the broker or the exchange.
The initial margin is the inverse of the leverage. A 5:1 leverage corresponds to a 20 percent initial margin, a 10:1 leverage corresponds to a 10 percent initial margin, and a 20:1 leverage corresponds to a 5 percent initial margin. The formula is simple: initial margin percentage = 1 / leverage.
The maintenance margin is the trigger for a margin call. The trader who has a €10,000 initial margin and a 50 percent maintenance margin receives a margin call when the equity falls to €5,000. The trader must deposit additional funds to bring the equity back to the initial margin level.
Why the margin requirements matter
The first reason is the safety. The margin requirements are designed to protect the trader from a wipeout, and the margin requirements are the trader's main defense against the leverage. The trader who respects the margin requirements can survive a market downturn, and the trader who respects the margin requirements can stay in the market long enough to capture the gains.
The second reason is the cost. The margin requirements determine the financing charge, and the financing charge is a percentage of the position value. The trader who uses a low leverage pays a lower financing charge, and the trader who uses a high leverage pays a higher financing charge. The trader should compare the financing charge with the expected return, and the trader should not use leverage if the financing charge is higher than the expected return.
The third reason is the regulation. The regulator sets the minimum margin requirements for retail clients, and the regulator uses the margin requirements to protect the trader from over-leveraging. The trader who follows the regulator's rules is on the right side of the law, and the trader who ignores the rules can lose the licence to trade.
How the margin requirements are set
The first factor is the underlying asset. Volatile assets have higher margin requirements, and stable assets have lower margin requirements. The trader should check the margin for each asset.
The second factor is the trader classification. Retail clients have higher margin requirements than professional clients, and the regulator sets the minimum margin requirements for retail clients. The trader who qualifies as a professional client can apply for the lower margin, and the broker may require additional documentation.
The third factor is the market conditions. The broker can increase the margin requirements during periods of high volatility, and the broker can increase the margin requirements around news events. The trader should check the broker's margin policy, and the trader should be prepared for the margin to increase.
How to use the margin requirements well
The first rule is to size the position to the risk. The trader should size the position so that a stop-loss at 1 percent of the entry produces a 1 percent loss on the account. The position size is calculated as the dollar amount the trader is willing to lose, divided by the distance to the stop-loss.
The second rule is to use a stop-loss. The stop-loss limits the loss, and the stop-loss is the trader's main tool for managing the risk of a leveraged position. The stop-loss should be placed at a level that matches the trader's risk tolerance, and the stop-loss should not be moved against the trader.
The third rule is to keep a cash buffer. The trader should keep 6 to 12 months of margin payments in cash, and the cash should be in a separate account. The buffer protects the trader from a margin call during a temporary market downturn, and the buffer gives the trader time to top up the account.
The fourth rule is to monitor the margin level. The trader should check the margin level regularly, and the trader should set an alert at 30 percent above the maintenance margin. The alert gives the trader time to act before the broker sends a margin call.
The consequences of a margin call
The first consequence is the demand for additional funds. The broker demands additional funds to bring the equity back to the initial margin level, and the trader must deposit the funds within a short time. The trader who does not deposit the funds has the position liquidated by the broker.
The second consequence is the forced liquidation. The broker can liquidate the position at the next available price, and the liquidation can happen at the worst possible time. The trader realizes the loss, and the loss can be larger than the initial margin because of the slippage.
The third consequence is the negative balance. The trader who does not have enough equity to cover the margin call may end up with a negative account balance, and the broker can demand additional funds. The negative balance is rare, and the negative balance is more common on highly leveraged positions.
Common questions about margin requirements
What is the minimum initial margin? The minimum initial margin is set by the broker and the regulator. In the European Union, the minimum initial margin for stocks is 20 percent of the position value, which corresponds to a 5:1 leverage.
Can the margin requirements change? Yes, the broker can change the margin requirements at any time, especially around news events or during periods of high volatility. The trader should check the broker's margin policy, and the trader should be prepared for the margin to increase.
What happens if the margin is not met? The broker rejects the order or liquidates the position. The trader who does not have enough equity in the account cannot open the position, and the trader should deposit additional funds or reduce the position size.
Related resources
Where to start
If you are evaluating margin requirements, the most useful first step is to calculate the initial margin for a representative position, and to compare the margin requirements across three to five brokers. Our broker comparison lists the brokers that offer margin trading and the margin requirements, which together tell you what the broker offers before you place the first leveraged trade.