What is a primary purpose of maintenance margin?

The primary purpose of maintenance margin is to ensure that a trader maintains sufficient equity in their trading account. Maintenance margin is the minimum amount of equity that must be maintained in a margin account after a trade has been executed. It acts as a safeguard for both the broker and the trader, helping to prevent situations where the equity falls below a certain level due to adverse market movements.

When the equity in a trader's account drops below this level, the broker may issue a margin call, requiring the trader to deposit additional funds or securities to bring the account back to the required maintenance margin level. This mechanism helps to mitigate the risk of losses exceeding the amount initially invested, thus providing a form of risk management in margin trading. The maintenance margin is fundamental in ensuring responsible trading practices and protecting both the investor’s and the broker’s interests in fluctuating market conditions.