Important Values of a Margin Calls

Considerations
The important values that trigger a margin call, the margin equity, can change quickly. Assets in the amount of $10,000 purchased with a 50 percent margin loan have a margin equity of $5,000. A maintenance requirement of 25 percent represents a cash value of $2,500.

If the value of the assets declines to $8,000, the outstanding loan is still $5,000, so the margin equity becomes $3,000, and the maintenance level of 25 percent represents $2,000. At a total asset value of $6,000, the equity is only $1,000 but the maintenance level (25 percent of $6,000) is $1,500.

A margin call would be issued to generate the difference. A precipitous decline could cause investors to lose more than their initial investment.

Upon issuing a margin call, a broker usually expects account holders to bring their equity in line with the maintenance level immediately or at least by the end of the trading day.

Though a margin call alerts the account holder to the situation, it doesn't necessarily provide much opportunity to be proactive and prioritize stocks for liquidation. Concurrent with the issuance of a margin call and without warning, the broker can begin to sell assets in the account.


Margin Deals, in finance, transactions in which a purchaser buys securities by paying a percentage of the price and pledging the securities to guarantee payment of the balance of the price.

For example, an investor pays a broker a specified sum (margin) toward the purchase of shares of stock. The broker advances as a loan the remainder of the money needed to purchase the shares.

If the price of the stock remains constant or rises, the broker's loan is protected. If the price begins to fall, the broker notifies the investor that the stock will be sold unless an additional margin is advanced.

One of the worst pieces of news an investor can receive. Not only does it mean the value of his assets has declined, it could mean he has to deposit more money in his trading account. Margin calls are issued by brokers according to the terms of a margin agreement, which specifies the terms by which the broker lends funds to an account holder. The Federal Reserve regulates margin accounts and the terms of a specific margin agreement.

The purpose of a margin call is to inform an account holder that the equity in her stock positions has dropped below the minimum required maintenance level, and to activate certain provisions of the margin agreement. The federal reserve mandates a maintenance level of at least 25 percent, though some brokers set a much higher bar. In response to a margin call, investors must liquidate assets in their account to raise cash or deposit additional funds in their account.