The minimum initial requirement when purchasing 100 shares at $12 in a new account would be

What Is Initial Margin?

Initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account. The current initial margin requirement set by the Federal Reserve Board’s Regulation T is 50%. However, this regulation is only a minimum requirement; some equity brokerage firms may set their initial margin requirement higher. 

Key Takeaways

• Initial margin is the percent of a purchase price that must be paid with cash when using a margin account.   
• Fed regulations currently require that the initial margin is set at a minimum of 50% of a security's purchase price. But brokerages and exchanges can set initial margin requirements higher than the Fed minimum.
• Initial margin requirements are different from maintenance margin requirements, which is the percent of equity that must be retained on an ongoing basis in the account.

Initial Margin

How Does Initial Margin Work?

To open a margin account 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 encourages investors, traders, and other market participants to use leverage to purchase securities with a total value that's greater than the available cash balance in the account. 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.

Futures and initial margin 

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.

During periods of high market volatility, futures exchanges may increase initial margin requirements to any level they deem appropriate, matching the power of equity brokerage firms to increase initial margin levels above those required by Fed regulation.

Initial Margin vs. Maintenance Margin 

Initial margin is distinct from maintenance margin. The two both relate to the amount of cash vs. the amount you can borrow when investing. However, the initial margin requirement is the amount of cash or collateral required to actually purchase securities; the Federal Reserve'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 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. 

Example of Initial Margin

As an example, assume an account holder wants to purchase 1,000 shares of Meta, Inc. (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. However, if the account holder opens a margin account and deposits the 50% initial margin requirement, or $100,000, the total purchasing power will rise to $200,000. In this case, the margin account has access to two-to-one leverage.

An investor is considering the purchase of a small office building. The NOI is expected to be the following: Year 1, $232,000; Year 2, $242,000; Year 3, $252,000; Year 4, $262,000; Year 5, $272,000. T...

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The Robin’s Basket operates a chain of Italian gelato stores. Although the Robin’s Basket charges customers the same price for all flavors, production costs vary, depending on the type of ingredients. Budgeted and actual operating data of its Washington, D.C., store for August 2017 are as follows: $$ \begin{matrix} \text{Budget for August 2017} & \text{Selling Price per Pint} & \text{Variable Cost per Pint} & \text{Contribution Margin per Pints} & \text{Sales Volume in Pints}\\ \text{Mint chocolate chip} & \text{\$9.00} & \text{\$4.80} & \text{\$4.20} & \text{35,000}\\ \text{Vanilla} & \text{9.00} & \text{3.20} & \text{5.80} & \text{45,000}\\ \text{Rum raisin} & \text{9.00} & \text{5.00} & \text{4.00} & \text{20,000}\\ \text{} & \text{} & \text{} & \text{} & \text{100,000}\\ \end{matrix} $$ $$ \begin{matrix} \text{Budget for August 2017} & \text{Selling Price per Pint} & \text{Variable Cost per Pint} & \text{Contribution Margin per Pints} & \text{Sales Volume in Pints}\\ \text{Mint chocolate chip} & \text{\$9.00} & \text{\$4.40} & \text{\$4.20} & \text{33,750}\\ \text{Vanilla} & \text{9.00} & \text{3.25} & \text{5.75} & \text{56,250}\\ \text{Rum raisin} & \text{9.00} & \text{5.15} & \text{3.85} & \text{22,500}\\ \text{} & \text{} & \text{} & \text{} & \text{112,500}\\ \end{matrix} $$ The Robin's Basket focuses on contribution margin in its variance analysis. 1. Compute the total sales-volume variance for August 2017. 2. Compute the total sales-mix variance for August 2017. 3. Compute the total sales-quantity variance for August 2017. 4. Comment on your results in requirement 1, 2, and 3.

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Becton Labs, Inc., produces various chemical compounds for industrial use. One compound, called Fludex, is prepared using an elaborate distilling process. The company has developed standard costs for one unit of Fludex, as follows: $$ \begin{matrix} \text{ } & \text{Standard Quality} & \text{Standard Price or Rate} & \text{Standard Cost}\\ \text{Direct materials} & \text{2.5 ounces} & \text{\$ 20.00 per ounce} & \text{\$ 50.00}\\ \text{Direct labor} & \text{1.4 hours} & \text{\$ 12.50 per hour} & \text{17.50}\\ \text{Variable manufacturing overhead} & \text{1.4 hours} & \text{\$ 3.50 per hour} & \text{4.90}\\ \text{ } & \text{ } & \text{ } & \text{\$ 72.40}\\ \end{matrix} $$ During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 12,000 ounces at a cost of $225,000. b. There was no beginning inventory of materials; however, at the end of the month, 2,500 ounces of material remained in ending inventory. c. The company employs 35 lab technicians to work on the production of Fludex. During November, they worked an average of 160 hours at an average rate of$12 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $18,200. e. During November, 3,750 good units of Fludex were produced. 1. For direct materials: a. Compute the price and quantity variances. b. The materials were purchased from a new supplier who in anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract? Explain. 2. For direct labor: a. Compute the rate and efficiency variances. b. In the past, the 35 technicians employed in the production of Fludex consisted of 20 senior technicians and 15 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to save costs. Would you recommend that the new labor mix be continued? Explain. 3. Compute the variable overhead rate and efficiency variances. What relation can you see between this efficiency variance and the labor efficiency variance?

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