Margin call
Margin call
While the value of the stocks used as collateral for the margin loan fluctuates with the market, the amount you borrowed does not. As a result, if the stocks fall, your equity in the position relative to the size of your margin debt will shrink.
This is important to understand, because brokerage firms require that margin traders maintain a certain percentage of equity in the account as collateral against the purchased securities—typically 30% to 35%, depending on the securities and the brokerage firm.2
If your equity falls below the minimum because of market fluctuations, your brokerage firm will issue a margin call (also known as a maintenance call), and you will be required to immediately deposit more cash or marginable securities in your account to bring your equity back up to the required level.
So, assume you own $5,000 in stock and buy an additional $5,000 on margin. Your equity in the position is $5,000 ($10,000 less $5,000 in margin debt), giving you an equity ratio of 50%. If the total value of your stock position falls to $6,000, your equity would drop to $1,000 ($6,000 in stock less $5,000 margin debt) for an equity ratio of less than 17%.
If your brokerage firm's maintenance requirement is 30%, then the account's minimum equity would be $1,800 (30% of $6,000 = $1,800). Accordingly, you would be required to deposit:
- $800 in cash ($1,000+$800=$1,800), or
- $1,143 of fully paid marginable securities (the $800 shortfall divided by [1 –the .30 equity requirement] = $1143), or
- Or some combination of the two.
Important details about margin loans
- Margin loans increase your level of market risk.
- Your downside is not limited to the collateral value in your margin account.
- Your brokerage firm may initiate the sale of any securities in your account without contacting you, to meet a margin call.
- Your brokerage firm may increase its "house" maintenance margin requirements or remove specific securities from the marginable list at any time and is not required to provide you with advance written notice.
- You are not entitled to an extension of time to meet a margin call.
