Initial Margin Explained: What It Is, How It Works, and Examples

Definition

Initial margin is the cash or collateral an investor must deposit to open a leveraged position using a margin account or futures contract. In U.S. equity trading, Regulation T (Reg T) sets a minimum initial margin of 50% for purchases on margin, meaning an investor must provide at least half the purchase price in cash or eligible securities. Futures and exchange-traded contracts often require much lower initial margin percentages set by exchanges.

How Initial Margin Works

A margin account lets an investor borrow from a broker to buy securities, using the purchased securities as collateral.
The broker charges interest on the borrowed amount.
Initial margin is the upfront equity required to enter a position; maintenance margin is the minimum equity that must be maintained thereafter to keep the position open.
If account equity falls below the maintenance margin, the broker issues a margin call requiring additional funds or liquidation of positions.

Practical Examples

Stocks (Reg T): Buy 1,000 shares at $200 = $200,000 total. With a 50% initial margin, you must deposit $100,000; the broker lends the remaining $100,000. This yields 2:1 leverage.
Futures: An exchange might set initial margin at 5% for a contract valued at $100,000. Posting $5,000 gives a 20:1 leverage factor. Exchanges can raise margins during periods of high volatility.

Initial Margin vs. Maintenance Margin

Initial margin: Upfront amount required to open a position (Reg T minimum for equities is 50%).
Maintenance margin: Ongoing equity threshold required to keep the position open. Minimum maintenance levels are typically lower (commonly around 25% for many equity positions), but brokers and exchanges can set higher requirements—especially for volatile securities.

Risks and Considerations

Leverage amplifies both gains and losses; a relatively small adverse price move can wipe out equity or trigger a margin call.
If securities fall sharply, brokers may liquidate positions without prior consent to satisfy margin requirements.
Brokers may impose higher initial or maintenance margins than regulatory minimums based on risk or account history.
Interest on borrowed funds reduces net returns and increases cost of holding leveraged positions.

How to Calculate Initial Margin

For a purchase: Initial margin required = Purchase price × Initial margin percentage.
Example: $200,000 × 50% = $100,000 required deposit.
For futures: Initial margin required = Contract value × Exchange margin percentage.
Example: $100,000 × 5% = $5,000 required deposit.

Best Practices

Understand your broker’s specific margin policies and margin call procedures.
Monitor positions and maintain a buffer above the maintenance margin to avoid forced liquidations.
Use leverage conservatively and consider the impact of interest costs and worst-case price moves.
Consider diversification and position sizing to limit the downside risk of leveraged trades.

Key Takeaways

Initial margin is the upfront equity to open a leveraged position; Reg T sets a 50% minimum for equities.
Futures often require lower initial margins, enabling higher leverage (e.g., 20:1 with 5% margin).
Maintenance margin is a separate, ongoing requirement; brokers and exchanges can set higher levels.
Leverage increases both potential returns and potential losses—manage margin risk proactively.

Sources:
– U.S. Securities and Exchange Commission — Investor Bulletin: Understanding Margin Accounts
– Financial Industry Regulatory Authority (FINRA) — Rule 4210: Margin Requirements