What happens if I cannot pay a margin call?

By Jean Folger AAA
A:

Minimum margin is the amount of funds that must be deposited with a broker by a margin account customer. With a margin account, you are able to borrow money from your broker to purchase stocks or other trading instruments. Once a margin account has been approved and funded, you are able to borrow up to a certain percentage of the purchase price of the transaction. Because of the leverage offered by trading with borrowed funds, you can enter larger positions than you would normally be able to with cash; therefore, trading on margin can magnify both wins and losses. However, just as with any loan, you must repay money lent to you by your brokerage.

The minimum margin requirements are typically set by the exchanges that offer the various shares and contracts. The requirements change in response to factors such as changing volatility, geopolitical events and shifts in supply and demand. The initial margin is the money that you must pay from your own money (i.e., not the borrowed amount) in order to enter a position. Maintenance margin is the minimum value that must be maintained in a margin account.

A margin call occurs if your account falls below the maintenance margin amount. A margin call is a demand from your brokerage for you to add money to your account or close out positions to bring your account back to the required level. If you are do not meet the margin call, your brokerage firm can close out any open positions in order to bring the account back up to the minimum value. Your brokerage firm can do this without your approval and can choose which position(s) to liquidate. In addition, your brokerage firm can charge you a commission for the transaction(s). You are responsible for any losses sustained during this process, and your brokerage firm may liquidate enough shares/contracts to exceed the initial margin requirement.

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