Legal Definitions - margin requirement

Definition: Margin requirement refers to 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: Let's say you want to buy $10,000 worth of stock on margin. If the margin requirement is 50%, you would need to deposit $5,000 with your broker to complete the purchase.

Explanation: The margin requirement is a way for brokers to ensure that investors have enough money to cover potential losses. By requiring a deposit, the broker can use those funds to cover any losses if the value of the security drops. In the example above, the investor would need to deposit $5,000 to cover half of the purchase price. If the stock drops in value and the investor can't cover the losses, the broker can sell the stock to recoup their funds.