# Initial Margin Explained: Requirements, Examples & How It Works

> **Definition**
>
> Initial margin is the percentage of a security's purchase price that must be covered by cash or collateral when a trader uses a margin account, with a minimum requirement of 50% set by the Federal Reserve.

## What Is Initial Margin?

Initial margin refers to the percentage of a security’s purchase price that an investor must put up when buying on margin. The Federal Reserve regulates it, with Regulation T setting a minimum of 50%. Using margin allows leverage, which can increase potential gains and risks. Futures contracts often have lower initial margin requirements than stocks. It’s important to know that initial margin is the upfront amount needed, while maintenance margin is the minimum account balance required to keep the position open.   

### Key Takeaways

*   Initial margin is the required cash or collateral to purchase securities using a margin account, set by the Federal Reserve at a minimum of 50%.  
    
*   Brokerage firms can set their initial margin requirements higher than the Federal Reserve's minimum, offering greater leverage but with increased risk.  
    
*   Initial margin differs from maintenance margin, which is the ongoing equity the account holder must retain.  
    
*   Futures contracts may have lower initial margin requirements, with leverage factors reaching up to 20x.  
    
*   Using margin increases both potential profits and potential losses, requiring careful consideration by investors.

![Initial Margin: The percentage of a security's price that investors must cover with cash or collateral when using a margin account.](https://www.investopedia.com/thmb/iWgf-I7o1LoL1sJr1GifUfDMH5o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Initialmargin_sketch_final-7e686eee55ff4df588c4a9f2d7ce0693.png)

*— Investopedia / Michela Buttignol*

## Understanding the Mechanics of Initial Margin

To open a [margin account](https://www.investopedia.com/ask/answers/200.asp) at a brokerage firm, an account holder first needs to post a certain amount of cash, securities or other collateral, known as the initial margin requirement. A margin account lets investors buy securities worth more than their available cash by using leverage. A margin account is essentially a line of credit in which interest is charged on the outstanding margin balance.

Securities in the margin account are paid for with cash loaned to the account holder by the brokerage firm and are designated as collateral. This process allows for magnification of potential profits but also magnifies potential losses. In the extreme event that securities purchased in a margin account decline to zero value, the account holder needs to deposit the full initial value of the securities in cash or other liquid collateral to cover the loss.

### Initial Margin Requirements in Futures Trading

For futures contracts, exchanges set initial margin requirements as low as 5% or 10% of the contract to be traded. For example, if a crude oil futures contract is quoted at $100,000, a futures account holder can enter a long position by posting only $5,000 initial margin, or 5% of the contract value. In other words, this initial margin requirement would give the account holder a 20x leverage factor.

Futures exchanges can raise initial margin requirements during high market [volatility](https://www.investopedia.com/terms/v/volatility.asp), just like brokerage firms.

## Comparing Initial Margin and Maintenance Margin

Initial margin differs from maintenance margin; both relate to cash and borrowed amounts for investing. However, the initial margin requirement is the amount of cash or collateral required to actually purchase securities; the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservesystem.asp)'s Regulation T sets that sum at a minimum of at least 50% of the purchase. In other words, you can't borrow more than half the price of the investment.

In contrast, the [maintenance margin](https://www.investopedia.com/terms/m/maintenancemargin.asp) is the amount of equity that must be kept in the margin account going forward. The minimum maintenance margin requirement set by Reg T is 25%. That means an investor must maintain enough cash or collateral value in the account to cover 25% of the securities owned. 

Maintenance margin helps ensure account holders maintain collateral in the account should the value of their securities fall. Some securities, especially volatile ones, will have higher margin requirements set by brokerages. 

## Practical Example of Initial Margin in Action

As an example, assume an account holder wants to purchase 1,000 shares of Meta, Inc. ([META](https://www.investopedia.com/markets/quote?tvwidgetsymbol=META)), formerly Facebook, which is quoted at $200 per share. The total cost for this transaction in a cash balance account would be $200,000. If the investor opens a margin account and deposits $100,000, the purchasing power increases to $200,000. In this case, the margin account has access to [two-to-one leverage](https://www.investopedia.com/terms/l/leverageratio.asp).

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Understanding Margin Accounts](https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_marginaccount)."
>     
> 2.  Financial Industry Regulatory Authority. "[4210\. Margin Requirements](https://www.finra.org/rules-guidance/rulebooks/finra-rules/4210)." Accessed Nov. 11, 2020.