Suppose the share price drops to $85. The net worth is now only $5 (the previous net worth of $20 minus the $15 share price drop), so to obtain the broker`s minimum margin, Jane must increase that net worth to $10 or more, either by selling the stock or by repaying a portion of the loan. The initial margin requirement is the amount of guarantees needed to open a position. Then, the necessary security until the position closes is the maintenance requirement. Maintenance requirements are the minimum amount of security required to keep the position open and are generally below the original requirement. This allows the price to move against the margin without forcing a margin call immediately after the initial transaction. If the total value of the security is covered by the maintenance margin requirement, the facility owner must mortgage additional collateral to restore its overall balance or exceed the initial margin requirement. However, for instruments considered to be particularly risky, regulators, the stock exchange or the broker may set the maintenance burden above normal or equal to the initial risk reduction requirement relative to the risk accepted by the trader. For futures and derivatives clearing accounts, futures traders can calculate a premium or margin multiplier for trading requirements. This is usually an additional 10% to 25%.
As far as financing is concerned, the margin is the guarantee that the holder of a financial instrument must deposit with a counterparty (usually his broker or a stock exchange) to cover some or all of the credit risk that the holder represents for the counterparty. This risk may arise if the owner has taken one of the following steps: if the stock had fallen to $2.50, all of the client`s money would have disappeared. Since 1,000 shares – $2.50 is $2,500, the broker would inform the client that the position will be closed, unless the client no longer places capital in the account. The client has lost his money and can no longer hold the position. It`s a call to the margins. Jane sells a share of shares she does not own for $100 and puts $20 of her own money as collateral, which gives $120 of money to her account. Net worth (the amount of cash lowered in the share price) is $20. The broker wants a minimum margin of $10.
The guarantee of a margin account can be the money paid into the account or securities made available and represents the funds available to the account holder for further trading of shares.