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Simple English definitions for legal terms
initial margin requirement
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A quick definition of initial margin requirement:
Initial Margin Requirement: When someone wants to buy a stock using borrowed money (called margin), they have to give some of their own money as a deposit. This deposit is called the initial margin requirement. It's a percentage of the total amount they want to borrow and is set by the government to prevent people from borrowing too much and causing problems in the stock market.
Maintenance Margin Requirement: After someone has bought a stock on margin, they have to keep a certain amount of their own money in the account to avoid losing the stock. This is called the maintenance margin requirement and is also set by the government. It's a percentage of the total value of the account and helps ensure that people don't lose more money than they can afford to.
A more thorough explanation:
Definition: The initial margin requirement is the percentage of the purchase price that a buyer must deposit with a broker to buy a security on margin. This percentage is set and adjusted by the Federal Reserve Board.
Example: If a buyer wants to purchase $10,000 worth of stock on margin and the initial margin requirement is 50%, they would need to deposit $5,000 with their broker.
This requirement is in place to prevent excessive speculation and price volatility in the stock market. By requiring buyers to put down a certain percentage of the purchase price, it ensures that they have some skin in the game and are less likely to make risky investments that could lead to financial instability.