Margin Call: All You Need to Know

Introduction

A margin call occurs when your brokerage firm demands you to deposit more funds into your account because the value of your investments has fallen below a certain level. This is typically expressed as a percentage of the total value of your account.

Margin Call Thresholds

Different brokerage firms have different margin call thresholds, but they typically range from 25% to 50%. This means that if the value of your investments falls below 25% to 50% of the total value of your account, you will receive a margin call.

Consequences of a Margin Call

If you do not meet a margin call, your brokerage firm will sell your investments to cover the shortfall. This can result in you losing money, as the value of your investments may have fallen further since you purchased them.

Avoiding Margin Calls

There are a few things you can do to avoid margin calls:

• Maintain a healthy margin balance. This means having enough cash or other assets in your account to cover potential losses.
• Diversify your investments. This means investing in a variety of different assets, such as stocks, bonds, and cash. Diversification reduces the risk of your overall portfolio losing value.
• Be aware of the risks of using margin. Margin trading can amplify your profits, but it can also amplify your losses. Only use margin if you are comfortable with the risks involved.

Margin Call Procedures

If you receive a margin call, you will need to take the following steps:

1. Contact your brokerage firm. Your brokerage firm will be able to tell you how much money you need to deposit into your account to meet the margin call.
2. Deposit the funds into your account. You can deposit funds into your account by wire transfer, check, or electronic funds transfer (EFT).
3. Wait for the margin call to be released. Once you have deposited the funds into your account, your brokerage firm will release the margin call.

Margin Call Example

Let's say you have a margin account with a balance of $10,000. You purchase $5,000 worth of stock on margin, which means you borrow $5,000 from your brokerage firm to make the purchase.

The stock price then falls by 25%, and the value of your investment falls to $3,750. Your brokerage firm will now issue you a margin call, as the value of your investment has fallen below 50% of the total value of your account.

You will need to deposit $1,250 into your account to meet the margin call. If you do not do so, your brokerage firm will sell your stock to cover the shortfall.

Conclusion

Margin calls are a common occurrence in the stock market. By understanding how margin calls work, you can take steps to avoid them and protect your investments.