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 the rules that determine how much equity a trader must deposit to open and maintain a leveraged position. The rules are set by the broker, by the exchange, or by the regulator, and the rules depend on the underlying asset, the type of trader, and the market conditions. The trader should understand the initial margin, the maintenance margin, and the variation margin before opening a leveraged position.
The initial margin
The initial margin is the deposit the broker requires to open the position, and 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.
In the European Union, the initial margin for retail clients is 20 percent on stocks, which corresponds to a 5:1 leverage. The initial margin is higher for retail clients than for professional clients, and the initial margin is designed to protect the retail trader from large losses.
The maintenance margin
The maintenance margin is the minimum equity the trader must keep in the account to keep the position open. The maintenance margin is lower than the initial margin, and the maintenance margin is typically 50 percent to 75 percent of the initial margin. A 20 percent initial margin may have a 10 percent to 15 percent maintenance margin.
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.
The variation margin
The variation margin is the daily mark-to-market profit or loss on a futures position. The variation margin is paid or received at the end of each trading day, and the variation margin is added to or subtracted from the account balance. The variation margin is the daily settlement of the futures position.
The variation margin is unique to futures, and the variation margin is not used in CFD or stock margin trading. The variation margin produces the daily cash flow on the futures position, and the variation margin can be a credit or a debit depending on the direction of the move.
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 broker sets the margin based on the historical volatility, the average true range, and the bid-ask spread.
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.
The consequences of a margin call
A margin call is a demand from the broker to deposit additional funds to bring the equity back to the initial margin level. The trader who does not deposit the additional funds has the position liquidated by the broker, and the trader realizes the loss. The liquidation happens at the current market price, and the liquidation can happen at the worst possible time.
The margin call can be triggered by a single move in the underlying asset, and the margin call can be triggered by a series of small moves that erode the equity. The trader should monitor the margin level regularly, and the trader should set an alert at 30 percent above the maintenance margin.
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.