A minimum margin is a term that is used in investing circles, and has to do with the minimum balance that must be obtained in an investor’s margin account with a brokerage house. The idea for imposing a minimum margin is to ensure that there is enough cash within the account to balance the amount that the investor may choose to borrow on margin in order to acquire investments. Most exchanges and markets will require a certain amount within the margin account before accepting orders from that investor. In addition, brokerages may require a minimum margin that is higher than that required by an exchange, depending on the credit worthiness of the investor.
The ultimate purpose of a minimum margin is to protect all parties from situations that result in extreme financial hardship. As it relates to a brokerage house, imposing a minimum amount that must be maintained in a margin account helps to reduce the possibility of an investor being unable to pay off any debt generated as the result of buying on margin. Since the investor is basically borrowing money in order to make the acquisition, with the expectation of being able to settle the debt as the investment generates returns, incurring a loss on that investment could have severe consequences. When there is money in the margin account to cover that loss, both the investor and the brokerage house are able to overcome the setback and focus attention on other investment opportunities.
Along with a minimum margin that is necessary to keep the margin account active, there are also sometimes trade regulations that require a minimum margin that amounts to a specified percentage of the asking price of the investment that is under consideration for purchase. This means that if the investor is required to maintain a minimum margin in the account of $3,000 US dollars (USD) and wishes to buy on margin an investment that comes to $10,000 USD, regulations may require that the investor provide a payment of half that amount in order to be able to finance the remainder on margin. Specific regulations related to margin accounts and buying on margin vary somewhat from one country to the next, making it a good idea to consult with a broker in order to know how the account can be used to best effect.
One of the penalties for failing to maintain the minimum margin is what is known as a margin call. This type of call may occur when the balance in the account slips below a certain percentage of that minimum amount. At that point, the investor may be barred from further transactions in a market until the situation is corrected. In addition, the brokerage may freeze the account to further use and assess fees and penalties until the balance in the account once again reaches the required minimum.
