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What is a Margin Call?
A margin call occurs when an investor’s margin account falls below the broker’s required minimum value, prompting the broker to demand additional funds or securities to restore the account to the required maintenance margin.
Definition
A margin call is a broker’s request for an investor to deposit additional equity (cash or securities) into a margin account when the account value drops too low due to market losses.
Key Takeaways
- Triggered when account equity falls below maintenance margin.
- Requires the investor to add funds or sell assets.
- Protects brokers from excessive credit risk.
Understanding Margin Calls
When investors trade on margin, they borrow money from a broker to buy securities. The broker requires a certain level of equity (maintenance margin) to be maintained at all times.
If the value of the securities declines, the equity in the account shrinks and may fall below the maintenance requirement. When this happens, the broker issues a margin call.
The investor must then:
- Deposit more cash, or
- Add more securities, or
- Sell holdings to reduce the loan balance.
Failure to meet a margin call may result in the broker liquidating the investor’s assets without consent.
Formula (If Applicable)
Margin Level:
[ \text{Margin Level} = \frac{\text{Equity}}{\text{Borrowed Funds}} \times 100 ]
Trigger Condition:
Margin Call occurs when:
[ \text{Equity} < \text{Maintenance Margin Requirement} ]
Real-World Example
An investor buys P100,000 worth of stock using P50,000 of their own funds and P50,000 borrowed. If the stock price drops and equity falls to P35,000, the broker may issue a margin call requiring the investor to add funds to restore the required margin.
Importance in Business or Economics
Margin calls:
- Prevent excessive leverage risk
- Protect brokers against loan defaults
- Influence market volatility, especially during downturns
Widespread margin calls can accelerate market sell-offs.
Types or Variations
- Initial Margin
- Maintenance Margin
- Variation Margin
Related Terms
- Leverage
- Margin Trading
- Collateral
Sources and Further Reading
- Investopedia – Margin Call: https://www.investopedia.com
- FINRA – Margin Rules: https://www.finra.org
- SEC – Margin Requirements: https://www.sec.gov
Quick Reference
- Demand for more equity in a margin account.
- Triggered by declining asset values.
- Must be met quickly to avoid forced liquidation.
Frequently Asked Questions (FAQs)
How quickly must a margin call be met?
Often within 24–72 hours, depending on the broker.
Can a broker liquidate assets without notice?
Yes, most margin agreements allow immediate liquidation.
Do margin calls happen in all markets?
Common in stocks, futures, forex, and crypto margin trading.
