A margin call is a broker or clearing demand to add equity, reduce exposure, or face liquidation after margin requirements are not met.
A margin call is a broker or clearing demand to add equity, deposit collateral, reduce exposure, or otherwise bring an account back into compliance after it falls below a margin requirement.
The term can sound like a warning phone call, but in practice the broker may act quickly under the margin agreement. A margin call can lead to trading restrictions or forced sales if the account does not meet the requirement.
An investor holds $25,000 of stock financed with a $10,000 margin loan, leaving $15,000 of equity before interest and fees. If the stock falls to $18,000, the loan remains $10,000 and equity falls to $8,000.
If the broker’s current maintenance requirement is higher than the remaining equity, the account can receive a margin call. The investor may need to deposit cash, transfer eligible securities, or sell positions. If the account is not corrected, the broker may liquidate assets.
| Action | What it does | Limitation |
|---|---|---|
| Deposit cash | Increases account equity | Funds may not arrive in time |
| Transfer eligible securities | Adds collateral | Securities may not be marginable or may settle later |
| Sell positions | Reduces exposure and may reduce the loan | Sale price can be unfavorable |
| Close leveraged strategies | Cuts risk quickly | May crystallize losses or create tax consequences |
| Feature | Margin call | Stop-loss order |
|---|---|---|
| Trigger | Account equity falls below a requirement | Market price reaches an order trigger |
| Who controls action? | Broker or clearing firm may control account action | Investor sets the order instruction |
| Main purpose | Protects credit and collateral requirements | Attempts to limit trade loss |
| Key weakness | May happen during stress or after a gap | Execution price may differ from trigger price |