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 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 margininitial 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 2maintenance 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 marginas 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 