Holding Margin Definition – What does it say in trading?
Maintenance Margin Definition
The maintenance margin is an amount of money required to maintain an account with a trader. By “maintain” in this context is meant that the account is sufficiently covered with capital to pay for current investments. This should also apply in the event that transactions with leverage must be serviced or the positions start to show losses. If the initial deposited amount is not enough to cover the account and keep all positions open, the broker asks to add fresh money. This request from the broker is called a margin call, and the amount paid in addition is the holding margin or maintenance margin.
The easiest way to explain a maintenance margin is to use a calculation example.
Maintenance Margin Explained
The facts become clearer if they are illustrated with the help of an example. Let’s assume that the investor in our example is interested in 20 shares of company X. The current price of the shares of this company is the same as that of company X. The current price of the shares of this company is 50 euros. Since our investor assumes that these shares will rise, he positions himself long. 20 x 50 equals 1,000, so that the total investment volume amounts to 1,000 euros. Because the Investor operates with leverage 5, he must first transfer only the fifth part of this sum to his account, namely 200 euros. Once these 200 euros have been deposited, the trade can go through.
If, however, this amount becomes smaller, because, for example, the position makes losses contrary to the expectation, the following occurs directly the margin call of the broker, who is always called on the scene when the account is not sufficiently covered. Thus, in order for the position to remain open, fresh money must be deposited. If we assume that the amount in our investor’s account has dropped to 160 Euros, we are therefore dealing with a shortfall of 40 Euros. This is the amount that the investor needs to deposit in order to maintain his position. That is why this amount is accordingly called “holding margin”.
What is the difference between the holding margin and the entry margin?
Let’s stay with our example, in which the investor is interested in 20 shares of company X with a total volume of 1,000 euros. Because of the Leverage with the factor 5, he does not have to deposit the full amount at first, but only the fifth part, which in this case corresponds to 200 Euros. This sum, with which the investor thus enters, is the Entry Margin. The amount that has to be paid in addition when the account balance falls in order to hold the position is the holding margin.