What distinguishes initial margin from maintenance margin?

What distinguishes initial margin from maintenance margin?

• A. Initial margin is higher than maintenance margin
• B. Initial margin is required to open a position, while maintenance margin keeps it open
• C. There is no distinction; they are the same
• D. Maintenance margin is only needed for futures contracts

Answer: (B)

The distinction between initial margin and maintenance margin is essential for understanding how margin requirements function in trading. Initial margin is the amount of capital that a trader must deposit to open a position in a financial market. This requirement is typically set at a higher level to ensure that there is sufficient collateral to cover potential losses at the moment the position is initiated. Once a position is open, the maintenance margin comes into play. This is the minimum amount of equity that must be maintained in the margin account to keep the position open. If the account balance falls below this threshold due to market movements, the trader may receive a margin call, prompting them to deposit additional funds or reduce their position size. Therefore, the correct answer accurately reflects the function of each margin type: initial margin is needed to establish a position, while maintenance margin is necessary for keeping that position active. This framework is critical for risk management in trading as it helps prevent excessive leverage and ensures that traders maintain adequate capital to cover potential downturns in their investments.

The distinction between initial margin and maintenance margin is essential for understanding how margin requirements function in trading. Initial margin is the amount of capital that a trader must deposit to open a position in a financial market. This requirement is typically set at a higher level to ensure that there is sufficient collateral to cover potential losses at the moment the position is initiated.

Once a position is open, the maintenance margin comes into play. This is the minimum amount of equity that must be maintained in the margin account to keep the position open. If the account balance falls below this threshold due to market movements, the trader may receive a margin call, prompting them to deposit additional funds or reduce their position size.

Therefore, the correct answer accurately reflects the function of each margin type: initial margin is needed to establish a position, while maintenance margin is necessary for keeping that position active. This framework is critical for risk management in trading as it helps prevent excessive leverage and ensures that traders maintain adequate capital to cover potential downturns in their investments.