Definition
The term initial margin refers to the portion of the purchase price the investor must pay when buying securities on margin. Initial margin thresholds are enforced by brokers and established by the Federal Reserve Board.
Explanation
When buying securities, it is possible for the investor to borrow funds from a brokerage firm to pay for a portion of the purchase price. The investor's margin, or margin requirement, represents the funds the trader must provide to support their investment position. Regulation T of the Federal Reserve Board governs margin requirements and states the initial margin for stock is 50%.
If the price of the securities declines, the investor must ensure they maintain sufficient equity in the position, which is referred to as maintenance margin. If the investor's equity falls below this second threshold, a margin call will be made by the broker to the investor.
Example
An investor would like to buy 1,000 shares of Company ABC common stock at a price of $60.00 per share on margin. The initial margin provided by the investor is 50% of the purchase price, or $30,000. The remaining funds used to purchase the securities are supplied by the brokerage firm, essentially providing the investor with a loan. All gains associated with the investment would flow only to the trader. In the same manner, losses associated with these securities are the investor's responsibility.
Related Terms
.png)
The term margin refers to the minimum level of assets required to support an investment position. When an investor buys securities on margin, they are funding a portion of the purchase price with funds borrowed from a broker.
Moneyzine EditorNovember 6th, 2024
The term maintenance margin refers to the minimum equity portion of the purchase price the investor must maintain when they purchase securities on margin. Maintenance margin thresholds are enforced by brokers and established by the Federal Reserve Board.Moneyzine EditorJanuary 24th, 2024
The term lambda refers to a measure of the percentage change in the premium paid for an option for every percentage change in the price of the underlying asset. Lambda allows the investor to understand the sensitivity of an option's price to a change in the underlying asset's price.Moneyzine EditorNovember 6th, 2024
The term kappa refers to the change in the premium paid for an option for every one percent change in the volatility of the underlying asset. Kappa allows investors to understand the impact a change in volatility will have on an option's value.Moneyzine EditorJanuary 23rd, 2024- The term out-of-the-money refers to an option that has no intrinsic value. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.Moneyzine EditorNovember 6th, 2024
The term deep out-of-the-money refers to an option that has no intrinsic value and the strike price is significantly different than the market price of the asset. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.Moneyzine EditorNovember 6th, 2024- The term near-the-money refers to an option that is close to having intrinsic value based on the strike price of the option relative to the market price of the underlying asset. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.Moneyzine EditorNovember 6th, 2024
.png)
