Margin Call: Is It a Call From a Pretty Girl?

Have you ever suffered a margin call or wondered what it is? Here’s a quick explainer of what it is: A margin call takes place when the percentage (%) of a trader/investor’s equity in a margin account erodes below the host broker’s set rate. A margin account holds the securities or instruments bought or sold by a combination of the investor’s funds and leveraged funds from the host broker.

In simpler words, the term “margin call” refers specifically to a broker’s request that a client deposit more funds or securities to the margin account in order to bolster the client’s equity (and account value) to a minimum level specified by the maintenance requirement of the broker.

Trader’s Equity: The Funds Loaned to an Investor by a Brokerage Firm

The combination between investors’ funds and leveraged brokerage funds is called “trader’s equity.” Trader’s equity is the sum of the value of the assets held in the brokerage or margin account and the sum borrowed (leveraged) from the broker. The minimum fixed amount that the portfolio must contain is often determined by stockbrokers. The brokerage company will issue a margin call to an investor if the equity drops below that maintenance margin.

In order to satisfy the collateral requirement and prevent the stockbroker from ever feeling cheated, the trader must deposit this minimum amount in cash. To ensure that the borrower’s loaned amount is still secured, the broker will sell the trader’s positions if they fail to maintain the minimum account balance or the maintenance margin. Brokerage companies employ this strategy to protect themselves from customer defaults.

How Is Margin Call Regulated?

The initial margin requirement is established by the United States Federal Reserve Board’s Regulation, and it has been maintained at up to 50% since 1974.

Investors must maintain the maintenance margin in their accounts at a minimum of 25% of the entire value of the assets they have purchased on margin, according to the New York Stock Exchange (NYSE) and the US Financial Industry Regulatory Authority (FINRA).

That said the amount that stockbrokers offer to investors for the purchase of new stocks is up to them. Depending on what they need, it often ranges between 30% and 40%.

So contrary to what you might have thought before, a margin call is not a call from a pretty girl. It is a notice that your balance is gone, and you need to replenish your account in order to continue trading.