Using margin to invest means borrowing money from your brokerage to buy more securities than you could with your cash alone. While this can amplify gains, it also increases risks significantly. To mitigate risk, brokers enforce maintenance margin requirements — a minimum equity level you must maintain in your margin account.

When the value of your investments drops and your equity falls below this maintenance margin, your broker issues a margin call. This is a formal request to restore your account equity by either adding cash or securities or by selling some of your investments to reduce the loan balance. If you ignore the margin call, brokers have the right to liquidate assets from your account without your permission to cover the shortfall.

How Margin Calls Work:

  • Initial Margin Requirement: This is the percentage of an investment’s purchase price that you must fund with your own money at the time of purchase, typically at least 50% as mandated by the Federal Reserve’s Regulation T.
  • Maintenance Margin: After buying on margin, you need to maintain equity usually around 25% of the total market value, although some brokers may require higher minimums.
  • Margin Call Trigger: A margin call occurs when your equity dips below the maintenance margin due to declining stock prices or other factors.
  • Responding to a Margin Call: You can meet the call by depositing additional cash or approved securities, sell some holdings to repay the loan, or a combination of both. Failing to respond may lead to automatic liquidation by your broker.

Example:
Suppose you buy $10,000 worth of stock using $5,000 of your own money and $5,000 borrowed on margin. The maintenance margin is 25%, so you need to maintain at least $2,500 in equity. If the stock value falls to $6,000, your equity is $1,000 ($6,000 – $5,000 loan), which is only 16.7%, triggering a margin call. You must quickly add funds or sell shares to restore equity.

Who Is Affected?

Margin calls primarily affect investors who trade using margin accounts—this includes active stock investors, day traders leveraging positions, and those trading marginable securities like options or futures. If you invest solely with cash, margin calls do not apply.

Strategies to Avoid Margin Calls

  • Maintain a cash buffer in your account to meet potential calls.
  • Understand your broker’s margin and maintenance requirements before trading.
  • Use stop-loss orders to limit losses on volatile positions.
  • Avoid maxing out your margin borrowing; lower leverage reduces the risk of calls.
  • Regularly monitor your account to respond promptly to market changes.

Common Misunderstandings

  • Margin calls are optional: No, you must act or the broker will sell assets.
  • Only occur in bear markets: They can happen anytime sudden price drops reduce equity.
  • Ignore margin calls safely: Ignoring can cause forced asset liquidation and substantial losses.
  • Margin increases gains without risk: Margin magnifies both gains and losses.

Frequently Asked Questions

  • How soon must I respond to a margin call? Response time varies; often within a day or two.
  • Can other assets cover a margin call? Yes, brokers typically accept approved securities or cash.
  • Will margin calls affect my credit? No; however, failure to meet calls can lead to forced sales impacting your investments.

For further details on margin accounts and related terms, see our Margin Account and Margin Call articles.

References

  • Investopedia, “Margin Call”: https://www.investopedia.com/terms/m/margincall.asp
  • Securities and Exchange Commission (SEC), “Buying on Margin”: https://www.investor.gov/introduction-investing/general-resources/glossary/buying-margin
  • Financial Industry Regulatory Authority (FINRA), “Margin Loans”: https://www.finra.org/investors/learn-to-invest/types-investments/margin-loans

Understanding margin calls is vital for anyone using borrowed funds to invest. Awareness and proactive management can help you avoid forced liquidations and manage risk effectively.