Margin Call

What is a Margin Call?

A margin call is a broker’s demand versus the investor to require deposit additional money or securities into a margin account when the account value falls below the firm’s prescribed margin maintenance requirement.

A margin call can only be triggered within a margin account, where the trader can borrow money from the broker to buy securities, resulting in leverage that amplifies both potential gains and losses.

How Margin Calls Work

Brokers will issue a margin call when the investor’s equity in the margined securities drops below the maintenance requirement, often around 25-30% of the total market value. Until the call is met, no further trades can be placed in the account except to raise cash or marginable securities.

Margin Requirements for Calls

There are regulatory minimum margins like a 50% initial requirement for stocks, but brokers can set their own higher “house” maintenance margins which trigger a call if breached, such as 30-40% of the securities’ value. Higher risk securities incur higher margin requirements.

Responding to a Margin Call

To meet a margin call, investors must quickly deposit enough cash or marginable securities to raise their account equity back above the maintenance margin level. Alternatively, they can choose to close/sell positions to reduce their margined exposure and meet the call.

Margin Call Consequences

If the margin deficiency is not satisfied by adding funds or closing trades, the brokerage has the right to liquidate the client’s positions to bring the account back up to the minimum requirements. This forced sale locks in losses for the investor, and the account may be restricted or closed.

Margin Call Examples

For example, if an account has $50,000 in equity and $100,000 in margined securities with a 30% maintenance requirement, a margin call would be triggered if the account value drops below $70,000 (30% of $100,000 security value). The investor would need to add cash or securities to get back above that $70,000 minimum.

Maintenance Margin Requirements

Maintenance margin requirements refer to the minimum brokerage account balance you need to maintain before your broker will issue a margin call.

This is calculated as a percentage of the total market value of the securities you hold on margin. While the legal minimum set by regulators is 25%, most brokers require 30-35% for stock positions to avoid excessive risk.

For volatile derivatives like options, maintenance margins can be 40% or higher. If your margined account value drops below this threshold, the broker will demand sufficient funds to rectify the deficiency.

Margin Requirements for Puts

When trading puts, whether covered or uncovered (naked), brokers apply specific margin requirements to mitigate risk from the leverage involved. For uncovered/naked put writes, the initial margin could be 100% of the strike price x 100 shares. This high requirement protects the broker if the option is assigned.

On the other hand, covered put writers may need to pay the option premium amount plus 20-30% of the underlying stock value until expiration. Put margins aim to ensure you can take assignment.

How to Avoid a Margin Call

There are a few ways investors can try to avoid margin calls altogether. First, never trade on margin beyond your risk tolerance and maintain excess equity well above maintenance levels. Use prudent position sizing and leverage.

Monitor your margined portfolio diligently and reduce exposure proactively during adverse moves. Finally, set personal equity level alerts to receive early warnings before nearing a call so you can address it. Being proactive beats reactive margin calls.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.