Margin Call
IntermediateA margin call is a demand from a broker for an investor to add money or securities to a margin account after losses have pushed the account's equity below the required minimum.
When an investor borrows from a broker to buy securities, the broker requires them to maintain a minimum level of equity, called the maintenance margin. This protects the broker if prices fall.
Suppose an investor buys 10,000 of shares using 5,000 of their own money and 5,000 borrowed, and the maintenance margin is 30%. If the shares fall to 7,000, the investor's equity is 2,000, which is about 29% of the account value. This is below the 30% requirement, so the broker issues a margin call.
The investor must then deposit cash, add other securities or sell some holdings to bring the account back above the minimum. If they do not act quickly, often within a few days or sometimes immediately, the broker can sell investments without asking, which may lock in losses at the worst possible time.
Margin calls can trigger forced selling across many investors during sharp market falls, adding to the decline. Avoiding excessive borrowing is the best way to avoid them.
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