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What is an Initial Margin?

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  • Written By: H. Bliss
  • Edited By: W. Everett
  • Last Modified Date: 19 November 2016
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When an investor purchases investment securities like stocks and bonds, she will often receive a partial loan from the brokerage to help her purchase more. Initial margin, also called the initial margin requirement, is the percentage of a stock purchase price that an investor must pay in her own money in order to invest in the security. The margin requirement is the absolute minimum an investor can deposit in the brokerage account to be eligible trade on borrowed money from the brokerage. In lieu of cash, an investor can also use other marginable securities, also called exempt securities, to meet the initial margin.

Borrowing from securities brokerage companies with a minimum initial margin can be a good way for an investor to get more money into the investment for more potential return, but it does have its risks. If an investment tanks and becomes worthless, the investor loses all of the cash she put into the account and ends up in debt to the securities brokerage. An investor using an initial margin brokerage loan must make sure she is not committing more than she can afford in a worst case scenario.

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Through a brokerage account, an investor can trade securities, which are financial investments. Types of securities include stocks, bonds, and pooled debt assets like loans. The brokerage account in which the investor can trade with borrowed money from the brokerage is called a margin account. In finance, a securities brokerage is a company that supplies a middle party who will act as a mediator between the buyer and the seller when trading securities. Usually, securities brokers specialize in a particular type of security.

In the world of investments, the broker acts as an agent for the transaction. An agent is a representative designated by the investor, who is also called the principal. The agent carries out transactions on behalf of the principal. In finance, agents do not own any of the principal's property, and they legally have to do what the investor tells them when it comes to the principal's money. When they sign agreements with client principals, agents must legally register as the principals' agents. Agents are required to register their statuses with the exchange at which they work before conducting any securities trades on that exchange.

The Federal Reserve Board, also known as the fed, sets monetary policy in the United States. This board sets the initial margin, at a value often about 50 percent of the total securities purchase value. For a stock market investor, this means that she must put up half of the value of the stocks she wishes to purchase in order to receive the other half of the money for the stock transaction as a loan from the brokerage. The value set by the Federal Reserve Board is only a minimum, and brokerages can ask for a higher percentage at their discretion.

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