What it is:
An initial margin is the amount of aas a percentage of the purchased on .
How it works (Example):
Let's assume you want to buy 1,000 shares on , you essentially borrow the other half of the from the brokerage firm and collateralize the loan with the Company XYZ shares. This original loan amount as a percentage of the amount is called the initial margin.of Company XYZ for $5 per share but don't have the $5,000 necessary to do so -- you only have $2,500. If you buy the
If the value of the Company XYZ shares drops past a certain point, say 25% of the original $5,000 value (or $1.25 per share; this point is called the maintenance margin), the brokerage firm may make a , meaning that within a few days you must more or sell some of the shares to offset all or part of the difference between the actual price and the maintenance margin. The does this because it has lent you $2,500 and wants to mitigate the risk of you defaulting on the loan. Federal Reserve regulations and the broker's internal policies determine the initial margin and maintenance minimum percentages.
Why it Matters:
accounts allow investors to make with their ' . They act as and can thus magnify . They can also magnify losses, and in some cases, a brokerage firm can sell an investor's securities without notification or even sue if the investor does not fulfill a . For these reasons, accounts are generally for more sophisticated investors who understand and can handle the risks involved.
It's important for investors to have self-control over margin call means that, in our example, not only do you have to pay back the original $2,500 of eventually, but you have to pay the call. However, if the rises from $5 to, say, $15, you've just made $10,000 without all of your own money.. Getting a
accounts must follow a agreement, which the investor must sign, as well as regulations imposed by the National Association of Securities Dealers, the Federal Reserve and even the New York Exchange.