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Minimum margins and your investments

On Behalf of | Dec 28, 2021 | FINRA |

Investors in Pennsylvania may benefit from learning more about minimum margins and how they can affect investments. Margin is when an investor borrows from a broker for investment, it’s the difference between the investment’s total value and the loan amount. A margin account allows investors to buy long on securities or sell short, based on a collateralized line of credit extended by the broker. Trading on margin amplifies the magnifies investors’ gains and losses.

Understanding minimum margins

Before selling short or trading on margin, investors are required to make a deposit into the margin account. Minimums vary between different trading accounts but financial regulators have set a bare minimum. The initial deposit must cover a percentage of the value of the securities the investor plans to buy or sell short. The minimum value set for the margin account must be maintained while the trading position remains open.

Meeting minimum margins

The Financial Industry Regulatory Authority, or FINRA, and the New York Stock Exchange require investors to deposit a minimum of $2000 in securities or cash for opening margin accounts. Brokerages may require investors to deposit more. Minimum margins are the first requirement in Federal Reserve Board’s Regulation T, the provisions governing margin accounts. The second requirement sets a 50 percent initial margin for entering trades. The third requirement is maintaining over 25 percent in equity or receiving a margin call.

Understanding margin call

A margin call means capital has to be added to the margin account after a trading loss to keep it above the minimum capital requirements. If the investor has used securities as collateral, and the market for those securities falls, the investor may be faced with a margin call if the value of the securities brings the account below the minimum margin.

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