Day Trading Margin vs. Maintenance Margin
If you trade frequently and rapidly, or if you engage in short sales, currency trading, option trading and the like, the margin account is your best friend. A margin account allows you to borrow funds and assets from your broker to enhance your trading ability and provide leverage, or the ability to make larger profits by buying and selling larger sums. The first step to trading on margin is to understand basic margin account requirements.
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What Is Margin?
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Margin is a line of credit. As with a traditional loan, in a margin trading account you have the right to borrow against account collateral -- the assets and cash you own -- in order to have cash and assets to trade. As with a loan, the margin trader pays interest on the amount borrowed, and must pay the value back in full at some point in the future. The value of margin credit is determined by the amount of collateral you have in your account, and is expressed as a percentage of that market value. In many cases, traders may borrow up to 50 percent of the amount of anything they plan to purchase -- the initial margin.
Maintenance Margin
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Once you have taken a margin loan, you must keep a certain value of collateral in your account at all times. This is called a maintenance margin. In most cases, this will be at least 25 percent of the total market value of your account. You can keep this value in cash or securities, although brokerage houses may restrict which securities can count as collateral for margin loans. Since the maintenance margin is dependent on total market value -- an amount that changes minute by minute -- most brokers have specific rules concerning when the margin is calculated and how quickly it must be adjusted if you fall short.
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Day Trading Requirements
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If you are a pattern day trader, the rules become more restrictive. The U.S. Securities and Exchange Commission, along with the Financial Regulatory Authority, requires that all pattern day traders keep a minimum of $25,000 collateral in their accounts at all times. If you dip below this mark, your day trading privileges are suspended until you deposit more collateral. In addition, traders cannot trade more than four times their maintenance margin in any given trading day. Pattern day traders are those who buy then sell, or short sell and then buy the same security in the same trading day more than four times in a five-day period. To be considered a pattern day trader, these types of trades must make up at least 6 percent of the trader's business in that same five-day period.
Margin Calls
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If you fall below your maintenance or day trading margin, you will have a margin call. You can remedy the situation in two ways, either by depositing cash to your account or by selling some of your securities. The potential for a margin call does add to the risk of trading -- if you do not have enough cash to cover your margin call, you may be forced to sell securities at a loss.
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