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a margin requirement
Market terminology

Margin requirements for the stock market: essence of the concept

07.07.2020
2 min read

Margin requirements are the requirements that an investor must make a minimum deposit into a personal account. This will allow trading. This principle allows to regulate the number of debt obligations and exclude their accumulation.

For which purpose the margin requirements are used

Marginal requirements apply in all countries, although they may differ from country to country in terms of legal regulation. In addition to common standards, each exchange has the right to make recommendations to its members.
The basis is considered to be the strategy adopted by the New York Stock Exchange, where for the first time ever it introduced margin requirements that apply to investors.
The size of the regulators is not fixed, usually there should be a certain percentage of the transaction value in the account. A large number of stock markets allow an investor to conduct a transaction if his account contains 50% of the planned amount. If the transaction brings profit, by means of the margin account they carry out another operation. Otherwise, the funds are needed to pay off losses.
When trading futures, the amount of claims depends on the final figure of the deal and its features. This allows the investor to perform exchange operations using margin, which reduces the risk of large financial losses.
Long positions imply approximately 25% of the required amount in the account, while short positions require 30%. Due to this, it is possible to exclude the possibility of margin call. Such a situation occurs when the value of purchased assets is reduced or increased by more values than specified by the broker.
Margin trading is the basis for stock exchanges. It is used for various financial instruments and transactions.
The main difference between a margin and a bank loan is that it does not require lengthy authorizations and coordination with a financial institution. In this case, only those assets are used that allow to conduct transactions, which require a margin account. According to the rules of the stock market, during the trading period investors can receive loans for free.
The amount of margin requirements depends on the liquidity of the asset involved in the transaction. The amount of margin on foreign exchange markets is usually up to 2%. If a loan is needed for more than one day, a fee is charged. Its amount is agreed upon in advance and can be calculated on the value of the assets.

a margin requirement

Margin accounts are profitable for investors. They allow you to make large transactions for which you do not have enough personal capital. This allows you to increase profits and achieve success faster. Margin on capital-intensive markets is especially important, the investor does not need to have the amount for the transaction, but enough funds in the account.
For a broker, margin requirements provide additional income from loans that last more than one day. It is much more profitable for them to place funds in a margin account than in a bank account.

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Chaslau Koniukh

Expert Chaslau Koniukh

Chaslau Koniukh – an expert in marketing and project management, IT consulting, international investments, investor, financial analyst. A commodity trader, private consultant, entrepreneur, lecturer, author of several articles on the stock market.

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