What Is a Margin Call?
A margin call occurs when the percentage of an investor’s equity in a margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with a combination of the investor’s own money and money borrowed from the investor’s broker.
A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that the value of the investor's equity (and the account value) rises to a minimum value indicated by the maintenance requirement
A margin call is usually an indicator that securities held in the margin account have decreased in value. When a margin call occurs, the investor must choose to either deposit additional funds or marginable securities in the account or sell some of the assets held in their account.
KEY TAKEAWAYS
- A margin call occurs when a margin account runs low on funds, usually because of a losing trade.
- Margin calls are demands for additional capital or securities to bring a margin account up to the maintenance requirement.
- Brokers may force a trader to sell assets, regardless of the market price, to meet the margin call if the trader doesn’t deposit funds.
- Margin calls can also occur when a stock goes up in price and losses start mounting in accounts that have sold the stock short.
- Investors can avoid margin calls by monitoring their equity and keeping enough funds in their account to maintain the value above the required maintenance level.
Margin Call
What Triggers a Margin Call?
When an investor pays to buy and sell securities using a combination of their own funds and money borrowed from a broker, the investor is buying on margin. An investor’s equity in the investment is equal to the market value of the securities minus the borrowed amount.
A margin call is triggered when the investor’s equity, as a percentage of the total market value of securities, falls below a certain required level (called the maintenance margin).
Margin calls can occur at any time due to a drop in account value. However, they are more likely to happen during periods of market volatility.