What is a Margin Call?
A margin call is a demand from a broker to a trader to deposit additional funds or securities to bring the trader’s margin account up to the minimum maintenance margin requirement. This is done to protect the broker from potential losses caused by the trader’s account having insufficient equity.
What is meant by the ‘maintenance margin requirement’?
The maintenance margin requirement is the minimum amount of equity that a trader must maintain in their margin account in order to hold open positions. It is expressed as a percentage of the securities used as collateral in the margin account, and it is set by the broker.
The maintenance margin requirement is used to ensure that the trader has enough equity in their account to cover potential losses on open positions.
How to Calculate Margin Call – Example:
|Security Value||Loan Amount||Equity ($)||Equity (%)|
|Security bought for $40,000 (half on margin)||$40,000||$20,000||Investor Equity = $20,000||Investor Equity = 50%|
|Value drops to $25,000||$25,000||$20,000||=$5,000||Investor Equity = 20%|
|Maintenance requirement of broker||$25,000||$7,500||30%|
|Resulting margin call||$2,500|
Margin Call Price Formula
Margin call = initial purchase price * [(1 – initial margin)/ (1 – maintenance margin)]
How to cover a margin call
Deposit additional funds: The first and most obvious way to cover a margin call is to deposit more money into your account. This can be done by transferring funds from another account or by selling securities in your portfolio.
Sell securities: If you don’t have the cash to deposit, you can sell some of the securities in your portfolio. This will decrease the amount of margin you are using and help you meet the maintenance margin requirement.
Close out positions: Another option is to close out some of your positions. This will reduce the amount of margin you are using and help you meet the maintenance margin requirement.
It’s important to note that if you are unable to cover a margin call, your broker may liquidate some of your positions in order to bring your account back up to the required level.
How to avoid a margin call
Understand your broker’s margin requirements: Before opening a margin account, make sure you understand the minimum maintenance margin requirement set by your broker. This will help you avoid a margin call by ensuring that you maintain a sufficient level of equity in your account.
Monitor your account: Regularly check your account balance and the value of your positions to ensure that you are meeting the maintenance margin requirement.
Use stop-loss orders: Placing stop-loss orders on your positions can help to limit your potential losses and prevent a margin call.
Diversify your portfolio: Diversifying your portfolio can help to spread the risk across different securities and industries. This can help to limit potential losses and prevent a margin call.
Avoid overleveraging: Avoid borrowing too much money to invest. This can increase your risk of a margin call.
By following these tips, you can help to avoid a margin call and protect your investments. It is important to keep in mind that the markets can be unpredictable, and even the most well-prepared investors can still experience a margin call.
Margin Call FAQs
Can a margin call be reversed?
A margin call is a demand from a broker to deposit additional funds or securities, and it cannot be reversed. However, if the trader is able to meet the margin call by depositing additional funds or securities, the margin call will be satisfied, and the trader’s account will be in good standing again.
What happens if I don’t meet a margin call?
If a trader does not meet a margin call, their broker may close out some or all of their open positions to bring the account back to the minimum maintenance margin requirement. This can result in significant losses for the trader.
Trade with a regulated broker
In the world of margin trading, it is crucial to work with a reputable and regulated broker. Regulated brokers are required to follow strict guidelines and are subject to regular audits and inspections to ensure they are operating in compliance with regulations. This provides an added level of protection for traders and their investments.
Check out our broker reviews across a range of regulated stock brokers and start trading with confidence.