Margin Call

A margin call is a drop in the value of an investor's margin account below the amount required by the broker. There are equities in an investor's margin account purchased with borrowed money (usually the investor's own money and money borrowed from the broker together).

A margin call is a request to an investor from a broker to put additional money or securities into an account in order to obtain a minimum value (maintenance margin).

A margin call is a signal that the value of one or more securities on a margin account has decreased. When an investor is required to submit a margin call, he or she can put additional money or securities into the account or sell some of the account's assets.

Understanding Margin Calls

A margin purchase is the purchase and sale of securities with the investor's money and money borrowed from the broker together. The value of the securities on the market minus the amount borrowed from the broker equals the investor's equity portion.

A margin call emerges when an investor's part of the total value of securities on the market decreases below the maintenance margin. The maintenance margin is a certain minimum required value in percentage. When an investor is unable to deposit funds (money or margin securities) to preserve the maintenance margin level, the broker may sell the account's securities on the market.

The New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA) are the managing bodies for the majority of firms dealing with securities in the United States. They have a margin requirement set at minimum 25% of the total security's value.

Some brokerage firms have a higher requirement. They require 30% to 40% of the total value of securities as maintenance margin.

The values and prices of margin maintenance vary widely. They depend on the type of stock and the percentage of margin service.

If the maintenance margin level is not met according to the requirements, the broker may close all open positions in order to keep the minimum value. The investor's agreement is not required for this. It means that the broker is able to sell any equities, in any quantity, without the investor's acquaintance. In addition, he or she can charge a commission for these deals. That is, any losses in this process are the investor's responsibility.

Bottom line

The margin requirement is the minimum amount of assets a client has to keep on his balance in order to use leverage.

For meeting the margin requirement, both money and securities can be used for many instruments.

Investors and brokers try to calculate the number of scenarios with the greatest possible losses for a portfolio over a certain period of time. Typically, the model is calculated by parameters based on:

• the quality of the portfolio you have;
• risks associated with the selected assets in the current market conditions.

The margin requirement shows how much value the portfolio could lose in a worst-case scenario. In some situations, a margin concentration penalty may be applied.