What is a minimum balance?

What Is a Minimum Balance? For bank accounts, the minimum balance is the minimum dollar amount that a customer must have in an account to receive some service benefit, such as keeping the account open or receiving interest.

investopedia.com - Minimum Balance: Definition, Requirements, and Margin Accounts

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What Is a Minimum Balance?

For bank accounts, the minimum balance is the minimum dollar amount that a customer must have in an account to receive some service benefit, such as keeping the account open or receiving interest. For margin accounts, it is the minimum deposit amount before margin trading is allowed, and after a stock is purchased on margin, the minimum balance is the maintenance margin requirement for the account. Key Takeaways The minimum balance for a bank account is the minimum dollar amount that must be maintained to receive certain benefits or to keep the account open. In margin accounts, the minimum balance is the minimum deposit amount required before trading occurs, and the maintenance margin required in the account after trading has begun. Minimum balances can be enforced by charging fees, denying interest payments, or closing the account if the minimum balance is not maintained. Not all banks require minimum balances and there are often ways to avoid one, such as utilizing only online services, setting up direct deposits, and for students, opening a student account. Margin accounts require the lesser of $2,000 or 100% of the purchase price of the security as the minimum balance, as required by FINRA.

Understanding a Minimum Balance

When an individual opens up an account with a bank, they are often required to keep a minimum amount of cash in the account. This is the minimum balance and typically applies to checking accounts. Depending on the bank, the reason for the minimum balance varies. Some banks may require a minimum balance just to open the account and others may require it for preferential treatment with added services. Banks measure and enforce the minimum balance in different ways. If the account falls below the minimum balance it may be assessed fees, denied interest payments, or closed. The minimum balance is usually calculated as the actual dollar balance in the account but may be an average balance in the account over a certain period of time. This is beneficial for individuals that don't have a steady source of income. There can also be more than one minimum balance for the same account. For example, a certain balance may be required to keep an account open, while a higher balance may be necessary to qualify for fee waivers or interest payments on deposits. Many banks have different tiers for their customers, such as a "gold customer" or "silver customer" that come with different services and require different minimum balances. Banks require minimum balances for a variety of reasons. It allows the bank to have more deposits, which in turn allows them to lend more money and maintain certain regulatory financial ratio requirements. It also allows them to profit from fees if balances are not maintained. In short, it is a way for them to make money off of your account and to cover the cost of operating your account.

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Not all banks charge minimum balances, and there are often ways to get around having a minimum balance requirement. These include banking online, setting up direct deposits, and for students, opening up a student account.

Minimum Balances in Margin Accounts

Margin accounts with a brokerage firm are subject to minimum balances. According to the Financial Industry Regulatory Authority (FINRA), a minimum deposit of $2,000 or 100% of the purchase price of the security, whichever is less, is mandatory to establish a margin account. After a stock is bought on margin, the maintenance requirement specifies the minimum amount of equity to be maintained in the account at all times. FINRA rules require this minimum balance of equity to be at least 25% of the total market value of the securities purchased on margin. It is at the discretion of individual brokerage firms to set the maintenance requirement percentage higher than 25%, with some going as high as 40% or even more depending on the type of securities purchased. If there is a shortfall, the brokerage firm will issue a margin call, a demand that the investor deposit additional cash or securities to satisfy the minimum balance of equity. Failing that, the brokerage firm will unilaterally liquidate securities in the account until the minimum is met.

investopedia.com - Minimum Balance: Definition, Requirements, and Margin Accounts