When you trade on margin, you have to put up only a certain percentage of your own money. The remainder comes from your broker in the form of a loan. Trading on margin lets you make more trades than if you paid for each trade from your own funds. If the market moves against your trade, your account may fall below the margin minimum. When that happens, you’ll receive either a Fed call or a margin call instructing you to bring your account up to the required level.
Federal Reserve Board Regulation T
The Federal Reserve Board (FRB) sets the minimum margin balance you must keep in your brokerage trading account. Under FRB Regulation T, you must have at least 50 percent of the security’s market value in your account before opening a trade. This is known as the initial margin. If your broker has a higher initial margin requirement, you must deposit the higher amount to trade on margin. You can keep cash, securities or a combination of both in your account to fulfill the margin requirement.
If you don’t have enough equity in your margin account to meet Regulation T requirements, you’ll receive what’s known as a Fed call. You must act immediately to satisfy a Fed call in one of three ways. Preferably, you’ll deposit additional securities or cash. Selling stock already in your margin account could result in a liquidation violation. If you don’t meet the Fed call within the allotted time, your brokerage firm will sell the securities in your account for you. If you get too many Fed calls or incur a liquidation violation, your margin account may be restricted or closed.
FINRA Maintenance Margin Requirement
Per Financial Industry Regulatory Authority (FINRA) regulations, you must deposit the greater of $2,000 or 100 percent of the market value of the security before you open a trade. Under Regulation T, you can borrow up to 50 percent of the security’s market value from your broker for the initial trade. After you buy the security, FINRA requires you keep at least 25 percent of the security’s market value in your account. This is known as the maintenance margin. Your broker can set the initial and maintenance margin amounts higher, but can’t reduce them.
Broker Margin Call
You’ll receive a margin call from your broker if your account falls below the 25 percent FINRA minimum margin requirement. You have two business days from when you first receive the call to deposit additional cash or securities, or to sell securities in your account. If you sell securities already in your account, you won't incur a liquidation violation. If you don’t meet the margin call, your broker can sell your securities without your consent. Your broker can suspend trading in your account if the market value of the sold securities isn’t enough to meet the margin call.
Video of the Day
- Electronic Code of Federal Regulations: Federal Reserve System: Regulation T: Section 220.12 - Supplement: margin requirements.
- Scottrade Knowledge Center: Margin: Fed Call
- Securities and Exchange Commission: Margin: Borrowing Money To Pay for Stocks - Know the Margin Rules
- Fidelity Investment: Trading FAQs – Exchange Margin
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