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Margin (Margin Requirement)

Moneyzine Editor
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Moneyzine Editor
1 mins
November 6th, 2024
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Margin (Margin Requirement)

Definition

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.

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. Generally, margin falls into one of two broad categories:

  • Initial Margin: while there are several standards, Regulation T of the Federal Reserve Board governs margin requirements and states the initial margin for stock is 50%. This means the investor must provide 50% of the funds used to purchase the stock.

  • Maintenance Margin: in the event the price of the securities falls, maintenance margin becomes the minimum margin provided by the investor. If the investor is not able to maintain their equity in the investment above the maintenance margin threshold, a margin call will occur. Regulation T of the Federal Board established a threshold of 30% as the maintenance requirement for stock purchased on margin.

Related Terms

  • Maintenance Margin (Maintenance Margin Requirement)
    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.
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  • Initial Margin (Initial Margin Requirement)
    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.
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  • Lambda (Options)
    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.
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  • Kappa (Vega)
    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.
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  • Deep Out-of-the-Money (Options)
    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.
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  • 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.
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  • 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.
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