Are you new to trading? However, you’re not sure what initial margin and mark-to-market margin means or whether you have to pay them to your brokerage company. Don’t worry; the problem gets solved here! In this blog, we will understand brokerage basics and whether it’s necessary to pay the sum of the initial margin and mark-to-market margin to the broker.
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The initial margin is the amount of money you need to have in your brokerage account to open a new position. The purpose of the same is to make sure that you have enough funds to tackle any potential issues that may arise if the trading goes wrong or is not in your favor.
The initial margin requirement is set by the regulator or exchange, where the security is traded. For instance, the initial margin requirement for a futures contract might be different from the initial margin requirement for stocks.
For instance, let’s take the example of an account holder who wants to buy 1,000 shares of company x. The organization has been quoted at $200 per share.
If the holder opens a margin account and posts the 50% initial margin requirement, or $100,000, then the total buying power will increase to $200,000. Hence, the margin account gets access to two-to-one leverage.
The mark-to-market margin is an additional amount that you may be asked to pay if your position’s value falls. This margin is calculated based on the current market value of the security and intends to ensure that you have enough funds as a trader to cover any potential losses that may arise. The mark-to-market margin is usually calculated and settled daily.
Yes, you will have to pay a mark-to-market margin to the broker if the value of your position starts decreasing. On the contrary, the broker would be entitled to pay you the mark-to-market margin if your value increases.
Brokers require initial margin and mark-to-market margin to ensure that their clients have enough funds to cover any potential losses that may occur. It is part of risk management. These tactics help brokers reduce the risks associated with their clients defaulting on their trades.
To sum up, initial margin and mark-to-market margin are two important terms you’ll surely come across while trading, especially if you are associated with a brokerage firm or a broker. They might be a bit confusing to understand at first, yet they are actually quite straightforward, as explained here.