What Is an Initial Margin Requirement?

Trading with margin can be quite a complicated feat to accomplish for newbie traders, especially with terms like leverage, margin calls, and initial margin requirements being thrown around. The initial margin requirement of an account is an incredibly important concept to understand, particularly if you'd like to trade with leverage.

Margin Requirement: Definition & Use

In simple terms, the initial margin requirement refers to the amount of money you must have in your account before you start trading with leverage. This amount is usually denominated in percentages, and it differs from brokerage to brokerage. Currently, the regulations set by the Federal Reserve state that the initial margin requirement must be 50%, but some brokerages have it set higher.

So, how does the initial margin requirement exactly work? Well, once you register at a brokerage, you'll need to have at least some capital to open a position. If you're using leverage in your trading, you'll have to post a certain amount of money (or other collateral) to serve as the initial margin requirement. This serves as a form of "credit" to cover any catastrophic losses or forced liquidations.

Keep in mind, though, that the initial margin requirement percentage might change in times of extreme market volatility. In case this happens, you'll be notified by your brokerage to increase the size of your collateral.

» Read about the role of free margin in CFD trading

Final Words

All in all, understanding the concept of an initial margin requirement is essential if you want to get involved in trading with leverage.

As always, make sure you stay informed about any changes to the initial margin requirement percentage so that you can adjust your strategies if needed. Lastly, remember that an initial margin requirement is a form of protection for both you and your brokerage.

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