Maintenance Margin

A margin account lets an investor borrow money to use for trading.

You have $100,000 in an account but want to buy $150,000 worth of shares in Better Win Inc. You can use margin to make up the additional $50,000.

Margin works like a loan. You pay interest on the amount you borrow. The stock purchased in the transaction becomes the collateral. If needed, your brokerage firm (the party loaning you the margin money) will make a margin call...they'll force you to sell the stock in order to pay back the loan if the transaction starts to go bad.

There are rules controlling margin transactions. Maintenance margin represents one of those guidelines. The Federal Reserve, one of the key U.S. financial regulators, has what's called Regulation T, dictating the requirements related to margin transactions.

The maintenance margin part states that you have to hold a minimum amount in an account involved in margin trading. The Fed requires 25%, but individual companies might set their barrier above that level.

The situation comes into play if the stock you purchase goes down in value. You buy $150,000 worth of Better Win Inc. at $15 a share (meaning you buy 10,000 shares). Pretty soon it falls to $10...your holdings drop from $150,000 to $100,000. Remember: you borrowed $50,000 to make the purchase. Your equity in the holdings is now just 50%. You hold $50,000 worth, and $50,000 worth is earmarked for a potential margin call. The stock falls again, this time to $6.60. Your holdings are now worth $66,000. You owe $50,000 and have $16,000 in equity; your equity represents about 24% of the total value of the holdings in your account, below the 25% barrier. Your broker makes a margin call. They liquidate your stock, take their $50,000 (plus whatever interest you owe) and leave you whatever little is left.

So. Much. Winning.