Maintenance Margin is the minimum amount of equity an investor must maintain in a margin account after a purchase has been made. Think of it as your broker’s safety net. When you buy securities on leverage (i.e., by borrowing money from your broker), your own capital in the account acts as a cushion against losses. The maintenance margin is the absolute lowest level that cushion is allowed to fall to. If the value of your investments drops and your equity dips below this threshold, your broker gets nervous. This level is set by the brokerage firm but must meet the minimums set by regulators, such as FINRA in the United States, which typically requires a minimum of 25% of the total market value of the securities in the account. This is different from the initial margin, which is the percentage of the purchase price you must pay for with your own cash to open the position in the first place.
The maintenance margin isn't just a number on a statement; it's a tripwire that can have very real and often painful consequences. If your account's equity falls below the maintenance margin level, you will face a dreaded margin call. A margin call is a demand from your broker to bring your account back into good standing. You have two primary ways to do this:
If you fail to meet the margin call promptly, the broker has the right to step in and sell your securities for you—without your permission and at the worst possible time—to cover what you owe. This is called a forced liquidation, and it can lock in significant losses, turning a temporary paper loss into a permanent, real-world one. It's the financial equivalent of being forced to sell your umbrella in the middle of a downpour.
Let's walk through a simple scenario to see the maintenance margin in action.
Imagine you want to buy 100 shares of a company, “Innovate Corp.” (ticker: INVT), trading at $100 per share. The total cost is $10,000.
Initially, everything is fine. Your Account Equity is the market value of your shares minus your loan amount.
Your equity of $5,000 is comfortably above the $3,000 requirement.
A negative news report hits Innovate Corp., and the stock price plummets to $70 per share. Let's recalculate.
Uh-oh. Your account equity ($2,000) has just fallen below the required maintenance margin ($2,100). Your broker immediately issues a margin call for the difference: $2,100 - $2,000 = $100. You must immediately deposit $100 or sell off some shares to fix the shortfall. If you don't, the broker will start selling your INVT stock for you.
Value investing, at its core, is about buying wonderful businesses at fair prices and holding them for the long term. It prizes patience and emotional discipline. Using leverage, and therefore being subject to maintenance margin rules, often runs counter to this philosophy. As the great Warren Buffett advises, “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.” A margin call forces an investor to sell, often at a market bottom, crystallizing a loss. This is the exact opposite of what a value investor wants to do. When a great company's stock is temporarily beaten down, a value investor wants to be buying more, not being forced to sell because of a loan covenant. While leverage can amplify gains, it equally amplifies losses and, more importantly, it introduces a risk that is outside of your control: the risk of being forced out of a position by market volatility. For this reason, most seasoned value investors use leverage sparingly, if at all. The potential for a modest increase in returns is rarely worth the risk of a catastrophic, permanent loss of capital. Your focus should be on the quality of the business you own, not on financial acrobatics.