Definition of Margin Call

A margin call occurs when an investor’s margin account balance falls below the required maintenance margin. The brokerage then demands additional funds or securities to cover potential losses. If the investor fails to meet the margin call, the brokerage may liquidate assets to recover the borrowed funds.

For example, if an investor purchases stocks using borrowed funds and the stock price drops significantly, their broker may issue a margin call requiring them to deposit more cash or sell assets to restore the minimum margin balance.

Purpose of a Margin Call in Trading

Margin calls play a crucial role in margin trading by:

• Ensuring investors maintain the required minimum equity in their margin accounts.
• Reducing brokerage firms' risks when extending leveraged funds to traders.
• Protecting financial institutions from excessive credit exposure.
• Encouraging responsible use of margin trading and borrowed funds.
• Preventing significant investor losses through forced liquidation of assets.

How a Margin Call Works

Margin Trading and Leverage

• Investors borrow money from a broker to buy more securities than their cash balance allows.
• The purchased securities serve as collateral for the borrowed funds.
• Example: An investor with $10,000 uses a margin account to buy $20,000 worth of stocks, effectively leveraging their investment.

Maintenance Margin Requirement

• Brokerages set a maintenance margin that investors must maintain.
• A margin call is triggered if the account’s value drops below this margin.
• Example: If an investor's brokerage requires a 25 percent maintenance margin, their account must have at least 25 percent equity at all times.

Forced Liquidation

• The brokerage may sell assets automatically if the investor does not deposit additional funds.
• Example: A trader who does not meet the margin call deadline may see their stocks sold at market price to recover the broker’s funds.

Causes of a Margin Call

Market Volatility

• Sharp declines in stock prices can quickly reduce an investor’s margin account equity.
• Example: A sudden drop in tech stocks triggers margin calls across multiple accounts.

Over-Leveraging

• Borrowing excessive funds without maintaining a cash buffer increases risk.
• Example: An investor using 80 percent margin leverage faces higher exposure to market downturns.

Insufficient Cash Reserves

• Investors who do not keep extra funds in their accounts may struggle to meet margin calls.
• Example: A trader without liquid assets is forced to sell securities at a loss.

Margin Call vs. Margin Requirement

Feature	Margin Call	Margin Requirement
Definition	A demand from a broker for additional funds or securities	The minimum equity percentage required in a margin account
Trigger	Occurs when equity falls below the maintenance margin	Set by brokerages and regulatory bodies
Example	A trader must deposit cash when account equity drops below 25 percent	A brokerage requires a 50 percent initial margin for stock purchases

Example: If an investor’s brokerage has a 50 percent initial margin requirement and a 25 percent maintenance margin, the investor must maintain at least 25 percent of the total account value to avoid a margin call.

Advantages and Disadvantages of Margin Trading

Advantages

• Increases purchasing power and potential investment gains.
• Allows investors to take advantage of market opportunities with borrowed funds.
• Can provide higher returns in bullish markets.

Disadvantages

• Increases risk, as losses are magnified due to leverage.
• Margin calls can force investors to sell assets at a loss.
• Requires careful monitoring of account balances and market fluctuations.

Related Terms

• Leverage – Using borrowed funds to increase investment size.
• Liquidation – The process of selling assets to meet financial obligations.
• Short Selling – A trading strategy where investors borrow and sell stocks, hoping to buy them back at a lower price.

Interesting Fact

During the 2008 financial crisis, many margin accounts were wiped out as stock prices plummeted, causing widespread forced liquidations due to margin calls.

Statistic

According to the Investment Industry Regulatory Organization of Canada (IIROC), margin account usage increased by over thirty percent in the last decade, reflecting a rise in leveraged investing.

Frequently Asked Questions (FAQ)

1. How can I avoid a margin call?

Investors can avoid margin calls by maintaining sufficient cash reserves, using less leverage, and regularly monitoring their margin account balance.

2. What happens if I can’t meet a margin call?

If an investor fails to meet a margin call, the brokerage may liquidate assets in the account to cover the outstanding debt.

3. Can a margin call happen overnight?

Yes, stock price fluctuations can trigger a margin call at any time, including after-hours trading sessions.

4. Do all brokerage accounts have margin calls?

No, only margin accounts are subject to margin calls, while cash accounts require full payment for securities.

5. What percentage is typically required for a margin account?

Most brokers require an initial margin of 50 percent and a maintenance margin of 25 percent, but requirements vary by institution.