Margin accounts increase the normal risks of investing. If you buy shares in a margin account and those shares lose 100% of their value, you lose the value of the shares and you still have to repay the borrowed funds. That’s leverage in a nutshell: it increases both potential gains and potential losses.
Minimum maintenance rules help keep customer margin accounts from deteriorating too far when the market moves against them. They also help protect the broker-dealer from being left with an unpaid loan (or, in a short account, an unwanted short position). This section covers minimum maintenance for both long and short margin accounts.
To work with minimum maintenance, it helps to use another version of the equity formula:
Let’s start with a simple setup. An investor buys 200 shares at $30 per share and deposits the required initial margin. The equity formula in dollars is:
$6,000 (LMV) - $3,000 (debit) = $3,000 (equity)
Now calculate equity as a percentage:
Equity % = $3,000 (equity) / $6,000 (LMV)
Equity % = 50%
That 50% makes sense: the investor owns $3,000 of a $6,000 position. When market value changes, LMV changes, and the equity percentage changes with it. Here’s an example.
An investor purchases 200 shares of ABC stock at $300 and deposits the required margin. The market price then falls to $175. What is the equity amount in dollars and percent?
First, establish the starting account:
$60,000 (LMV) - $30,000 (debit) = $30,000 (equity)
The investor buys $60,000 of stock (200 × $300). The initial margin deposit is 50% of the purchase price (or $2,000, whichever is greater). Here, 50% is greater, so the investor deposits $30,000 and borrows the other $30,000 from the broker-dealer (the debit).
Now apply the price drop to $175:
$35,000 (LMV) - $30,000 (debit) = $5,000 (equity)
LMV falls because the stock price fell (200 × $175 = $35,000). The debit doesn’t change because the investor hasn’t repaid or borrowed additional funds. Equity is now $5,000.
Finally, compute the equity percentage:
Equity % = $5,000 (equity) / $35,000 (LMV)
Equity % = 14.3%
At 14.3% equity, the account is in a dangerous spot. If the market keeps falling, the broker-dealer risks not being repaid the $30,000 loan. To limit that risk, FINRA enforces minimum maintenance rules.
The minimum maintenance for long accounts is 25% equity. If equity falls below 25%, the investor (or the broker-dealer) must correct the deficiency. Broker-dealers issue margin calls when an account falls below minimum maintenance. A margin call is a formal request to bring the account back into compliance.
There are three ways to resolve a long account maintenance deficiency:
If the investor deposits cash, that cash is typically used to reduce the debit balance. Reducing the debit increases equity (in both dollars and percent). Using the prior low-equity account:
$35,000 (LMV) - $30,000 (debit) = $5,000 (equity)
What would be the resulting equity (in $ and % form) if the investor deposited $10,000?
Can you figure it out?
First, update the dollar-based equity formula after the $10,000 deposit:
$35,000 (LMV) - $20,000 (debit) = $15,000 (equity)
Nothing in the question changes the stock’s market value, so LMV stays $35,000. The $10,000 deposit is used to repay part of the loan, so the debit falls to $20,000. Equity becomes $15,000.
Now calculate equity as a percentage:
Equity % = $15,000 (equity) / $35,000 (LMV)
Equity % = 42.8%
The equity percent rises from 14.3% to 42.8%, which is above the 25% minimum maintenance requirement.
The investor can also deposit “fully paid” securities. That means transferring securities the investor already owns (often from another account) into the margin account. This increases the collateral in the account without changing the debit.
Starting again from the low-equity account:
$35,000 (LMV) - $30,000 (debit) = $5,000 (equity)
What would be the resulting equity (in $ and % form) if the investor deposited $15,000 of fully paid stock?
First, update the dollar-based equity formula:
$50,000 (LMV) - $30,000 (debit) = $20,000 (equity)
LMV increases by $15,000 because more stock is added to the account. The debit doesn’t change because no loan repayment (or additional borrowing) occurred. Equity becomes $20,000.
Now calculate equity as a percentage:
Equity % = $20,000 (equity) / $50,000 (LMV)
Equity % = 40%
The equity percent rises from 14.3% to 40%, which is above the 25% minimum maintenance requirement.
The last remedy is to sell securities. The customer may sell voluntarily, or the broker-dealer may sell proactively. When the investor signed the margin agreement, they gave the broker-dealer the right to sell securities in the account at any time, with or without notice, to protect the firm’s loan.
Return to the low-equity account:
$35,000 (LMV) - $30,000 (debit) = $5,000 (equity)
What would be the equity (in $ and % form) if the investor (or the broker-dealer) sold $25,000 of stock?
$10,000 (LMV) - $5,000 (debit) = $5,000 (equity)
Selling reduces LMV by $25,000 because part of the position is closed. Unless stated otherwise, the sale proceeds are used to repay the margin loan, so the debit also falls by $25,000. The equity in dollars stays the same at $5,000.
Now recalculate equity as a percentage:
Equity % = $5,000 (equity) / $10,000 (LMV)
Equity % = 50%
The equity percent rises from 14.3% to 50%, which is above the 25% minimum maintenance requirement.
Now that you’ve seen how maintenance deficiencies are fixed, the next question is practical: How far can the market fall before the account hits minimum maintenance?
Use the original example:
$60,000 (LMV) - $30,000 (debit) = $30,000 (equity)
To find the market value where the account is exactly at 25% equity, use:
Apply it:
Mkt value at min. maint. = $30,000 (debit) / 0.75
Mkt value at min. maint. = $40,000
If LMV falls to $40,000, the account will be exactly at 25% equity. You can verify that with both equity formulas.
Dollar-based equity:
$40,000 (LMV) - $30,000 (debit) = $10,000 (equity)
Percent-based equity:
Equity % = $10,000 (equity) / $40,000 (LMV)
Equity % = 25%
The same idea applies to short accounts: minimum maintenance is meant to prevent the account from deteriorating to the point where the firm’s loan (and the short position) is at risk. The key differences are the required percentage and the mechanics.
Short accounts must maintain at least 30% equity (not 25% like long accounts). If equity falls below 30%, the investor or broker-dealer must correct the deficiency.
An investor has an already established margin account with a credit balance of $52,000 and a short market value of $20,000. The account value rises to $45,000. What is the equity amount (in $ and % form)?
First, compute equity in dollars:
$52,000 (credit) - 45,000 (SMV) = $7,000 (equity)
Now compute equity as a percentage:
Equity % = $7,000 (equity) / $45,000 (SMV)
Equity % = 15.5%
At 15.5%, the account is well below the 30% minimum maintenance requirement. A short account goes “underwater” if the SMV rises above the credit balance, meaning the cost to repurchase the shares exceeds the cash in the account.
There are two ways to fix a short margin account that falls below minimum maintenance:
Using the low-equity example:
$52,000 (credit) - 45,000 (SMV) = $7,000 (equity)
If the investor deposited $18,000 of cash in the account, what would be the changes to equity (in $ and % form)?
First, update the dollar-based equity formula:
$70,000 (credit) - 45,000 (SMV) = $25,000 (equity)
A cash deposit increases the credit balance. SMV stays the same because the market value of the short position didn’t change. Equity becomes $25,000.
Now calculate equity as a percentage:
Equity % = $25,000 (equity) / $45,000 (SMV)
Equity % = 55.5%
The equity percent rises from 15.5% to 55.5%, which is above the 30% minimum maintenance requirement.
The other fix is to repurchase shares to close part or all of the short position. As with long accounts, the investor may do this voluntarily, or the broker-dealer may do it proactively (the margin agreement gives the firm the right to do so).
Start again from the low-equity example:
$52,000 (credit) - 45,000 (SMV) = $7,000 (equity)
What would the equity change to (in $ and % form) if the investor closed $30,000 of the short position?
First, update the dollar-based equity formula:
$22,000 (credit) - 15,000 (SMV) = $7,000 (equity)
Closing part of a short position requires buying back shares. The repurchase uses cash from the credit balance, so the credit falls by $30,000. SMV also falls by $30,000 because the short position is smaller. Equity in dollars stays the same at $7,000.
Now calculate equity as a percentage:
Equity % = $7,000 (equity) / $15,000 (SMV)
Equity % = 46.7%
The equity percent rises from 15.5% to 46.7%, which is above the 30% minimum maintenance requirement.
As with long accounts, you can calculate the market value where the account would be exactly at minimum maintenance.
Reuse the original setup:
An investor has an already established margin account with a credit balance of $52,000 and a short market value of $20,000.
Dollar-based equity:
$52,000 (credit) - 20,000 (SMV) = $32,000 (equity)
Percent-based equity:
Equity % = $32,000 (equity) / $20,000 (SMV)
Equity % = 160%
Short accounts can show equity above 100% because the denominator is SMV, and the credit balance can be much larger than SMV.
To find the SMV where the account would be exactly at 30% equity, use:
Apply it:
Mkt value at min. maint. = $52,000 (credit) / 1.3
Mkt value at min. maint. = $40,000
If SMV rises to $40,000, the account will be exactly at 30% equity. Verify it:
Dollar-based equity:
$52,000 (credit) - $40,000 (SMV) = $12,000 (equity)
Percent-based equity:
Equity % = $12,000 (equity) / $40,000 (SMV)
Equity % = 30%
This video summarizes the important concepts related to minimum maintenance:
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