What Are Margin Agreements

Published by Admin on

The broker may review the value of collateral (margin) at any time after the risk assessment, for example. B based on market factors. If this results in the market value of the security of a margina account being covered by the revised margin, the broker or exchange immediately issues a « margin call » requiring the investor to reconcile the margin account. To do this, the investor must either deposit funds (the call) into the margin account, provide additional guarantees or sell a portion of the securities. If the investor does not reconcile the account, the broker can sell the investor`s security in order to reconcile the account. Marginal accounts can be very risky and not suitable for everyone. Before opening a margin account, you should understand that before trading a margin, FINRA requires, for example, to deposit at least $2,000 or 100% of the purchase price of the securities to your brokerage firm, depending on the lowest value. This is called « minimum margin. » Some companies may ask you to pour more than $2000. For more information on margin rules for day traders, see our Investor Bulletin: Margin Rules for Day Trading. Once you`ve purchased shares on Margin, FINRA rules require your broker home to impose a « maintenance requirement » on your Margin account.

This « maintenance requirement » indicates the minimum amount of equity you must keep in your margin account at any time. The equity in your margin account is the value of your securities, minus the shares you owe to your brokerage firm. FINRA rules require that this « maintenance requirement » be at least 25 per cent of the total market value of securities purchased on margina (i.e. « marginal securities »). However, many brokerage firms have higher maintenance requirements, usually between 30 and 40 percent and sometimes higher, depending on the type of securities purchased. The investor has the potential to lose more money than the funds deposited into the account. For these reasons, a margin account is only suitable for a demanding investor with a thorough understanding of additional investment risks and trading requirements with Margin. The guarantee of a margin account can be the money paid into the account or securities made available and represents the funds available to the account holder for further trading of shares. In U.S. futures, margins were previously referred to as performance bonds. Most exchanges today use the Standard Portfolio Analysis of Risk (SPAN) methodology, developed in 1988 by the Chicago Mercantile Exchange to calculate margins for options and futures.