What is a 'Margin Call'

A margin call happens when a brokerÂ demands that an investor deposits additional money or securities so that theÂ margin account is brought up to the minimum maintenance margin. A margin callÂ occurs when the account value falls below the broker's required minimum value.

Basically, this means that one or more of the securities held in the margin account decreased in value belowÂ a certain point. The investor must either deposit more money in the account or sell some of the assets held in the account.Â

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BREAKING DOWN 'Margin Call'

A margin call arises when an investor borrows money from a broker to make investments. When an investor uses margin to buy or sell securities, he pays for them using a combination of their own funds and borrowed money from a broker. An investor is said to haveÂ equity in the investment, which is equal to the market value of securities minus borrowed funds from the broker. A margin call is triggered when the investor's equity, as a percentage of the total market value of securities, falls below a certain percentage requirement, which is called the maintenance margin. While the maintenance margin percentage can vary among brokers, federal lawÂ establishes a minimum maintenance margin of 25%.

Example of a Margin Call

An investorÂ buys \$100,000 of a company's stockÂ by using \$50,000 of their own funds and borrowing the remaining \$50,000 from the broker. The investor's broker has a maintenance margin of 25%. At the time of purchase, the investor's equity as a percentage is 50%.

Investor's Equity As PercentageÂ = (Market Value of Securities - Borrowed Funds) / Market Value of SecuritiesÂ

In our example:Â  50% = (\$100,000 - \$50,000) / (\$100,000)

This is above the 25% maintenance margin, but suppose on the second trading day, the valueÂ of the purchased securities falls to \$60,000. This results in the investor's equity of \$10,000 (the market value of \$60,000 minus the borrowed funds of \$50,000), or 16.67%.

16.67% = (\$60,000 - \$50,000) / (\$60,000)

This is now below the maintenanceÂ margin of 25%. The broker makes a margin call, requiring the investor to deposit at least \$5,000 to meet the maintenance margin. The amount required to meet the maintenance margin is calculated as:

Amount to Meet Minimum MaintenanceÂ Margin = (Market Value of Securities x Maintenance Margin) - Investor'sÂ Equity

In our example, the required \$5,000 is calculatedÂ as:Â

\$5,000 = (\$60,000 x 25%) - \$10,000Â

The investor needs at least \$15,000 of equity (the market value of securities of \$60,000 times the 25% maintenance margin) in theirÂ account to be eligible for margin, but only has \$10,000 in investor's equity, resulting in a \$5,000 deficiency. The margin call is for \$5,000 and if the investor does not deposit the money in a timely manner, the broker can liquidate securities for the value sufficient to bring the account in compliance with the maintenance margin rules.

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