Margin Call

What Is Margin Call?

A margin call occurs when the worth of a margin account drops below the maintenance margin obligations. It is a requirement by a trading organization that the margin account is brought up to the lowest maintenance margin needed.

Deeper Definition

A margin call is sent to a client when the value of a margin account falls below the statutory slightest margin. A margin call is a brokerage request that customers fill up their balance by infusing additional cash or selling a portion of the asset to bring the account to the statutory minimum.

When a shareholder’s equity, as a proportion of the overall market value of assets, decreases below a specific percentage limit, a margin call is prompted (called the maintenance margin). If the user cannot manage to pay the needed amount to bring the worth of their investment up to the account’s maintenance margin, the stockbroker may be obliged to sell the account’s assets at market prices.

The Financial Industry Regulatory Authority (FINRA) and other financial authorities mandate brokerages to determine margin restrictions for user trading accounts.

When a user’s account drops below the necessary baseline amount, the brokerage may or may not execute a margin call, compelling the consumer to level up their account. Alternatively, they could sell a portion of the client’s shares without telling the user to return the margin account to the maintenance margin.

The formula for calculating the margin call goes thus:

Margin Call Price = Initial Purchase Price * [(1 – initial margin)/(1 – maintenance margin)]

WhereInitial Purchase Price is the price of an asset, initial margin is the minimum amount paid for the asset (in percentage), and the maintenance margin is the least amount that must be maintained by the user on the account as set by the broker.

Margin Call Example

For example, suppose an investor wants to buy a security for $100 with a 50% initial margin (which means the investor would use $50 of his own money to buy the asset and loan the other $50 from a broker). In addition, there is a 25% maintenance margin, which implies that the broker will request a margin call when the account drops below $66.67.