What Is a Margin Call?

A margin call occurs when the value of an investor's margin account falls below the amount requested by the broker. An investor's margin account contains securities purchased with borrowed money (usually a combination of investor's money and money borrowed from the investor's broker)  foreign exchange market today. A margin call specifically refers to a broker's request for an investor to deposit additional money or securities into the account to be brought down to the minimum value, known as a maintenance margin. A margin call is usually an indicator that one or more securities held in the margin account have lost value. When a margin call occurs, the investor must choose to either add more money to the account or sell some of the assets held in their account.



Understanding Margin Calls

When an investor pays to buy and sell securities with a combination of their own funds and money borrowed from a broker, it is referred to as buying on margin. An investor's equity in the investment is equal to the market value of the securities less the number of funds borrowed from their broker. A margin call is triggered when an investor's equity as a percentage of the total market value of the securities falls below a certain percentage (the maintenance margin)  forex trading platform in India. If the investor does not have the means to pay the amount necessary to bring the value of his portfolio to the account's maintenance margin, the broker may be forced to market securities in the account. The New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA) - the regulator of most investment firms operating in the United States - require investors to keep at least 25% of the total value of their securities on margin.12 Some brokerage firms charge them higher maintenance - up to 30% to 40%. Of course, the number and prices of margin calls depend on the percentage of margin retention and the inventory involved. In some cases, an investor can calculate the exact price at which stock must fall to trigger a margin call. Basically, this happens when the account value or account capital equals the maintenance margin requirement (MMR). The formula would be expressed as follows:

Account Value = (Margin Loan) / (1 - MMR)

For example, suppose an investor opens a margin account with $ 5,000 of his own money and $ 5,000 that he borrowed from his brokerage firm as a margin loan. You buy 200 shares of a share on margin for $ 50. (Under Regulation T, a provision that governs the amount of credit that brokerage firms and brokers can extend to their clients to purchase securities, an investor can borrow up to 50% of the purchase price.) that the investor safety margin be required of that investor is 30%.


There are stocks valued at $ 10,000 in the investor's account. In this example, a margin call is triggered when the account value drops below $ 7,142.86 (i.e. a margin loan of $ 5,000 / (1 - 0.30), which translates to a share price of $ 35.71 per share. Using the example above, let's say this investor's share price goes from $ 50 to $ 35. Your account is now worth $ 7,000, which triggers a margin call of $ 142.86. In this scenario, the investor has one of three options to remedy their lack of margin of $ 142.86:

Deposit $ 142.86 in Cash into the Margin Account

Deposit $ 142.86 of margin values into your margin account, reducing your account value to $ 7,142.86 Liquidation of shares valued at $ 333.33 with the resources used to reduce the margin of the loan; At the current market price of $ 35, this equates to 9.52 shares, rounded to 10 shares If a margin call is not fulfilled, a broker can close all open positions to reduce the account to the minimum value. In some circumstances, this can be done without the investor's consent. In effect, this means that the broker has the right to sell all the shares in the required amounts without notifying the investor. Furthermore, the broker may also charge an investor a commission for this (these) transaction (s). This investor is responsible for all losses incurred during this process.



Real-World Example of a Margin Call

For example, suppose an investor purchases $ 100,000 from Apple Inc. with $ 50,000 of his own funds. The investor borrows the remaining $ 50,000 from the broker from him. The investor's broker has a 25% maintenance margin. At the time of purchase, the share capital of the investor is 50%. The investor's equity is calculated using this formula: Investor's capital in percentage = (market value of the securities - funds loaned) / market value of the securities. In our example: ($ 100,000 - $ 50,000) / ($ 100,000) = 50%. That's above the 25% maintenance margin. For example, suppose the value of the securities purchased falls to $ 60,000 two weeks later. This reduces the investor's capital to $ 10,000. (The market value of $ 60,000 less $ 50,000 of borrowed funds, or 16.67%: $ 60,000 - $ 50,000 / $ 60,000). This is now less than the 25% maintenance margin. The broker makes a margin call and asks the investor to deposit at least $ 5,000 to cover the maintenance margin. The broker asks the investor to deposit $ 5,000 because the amount required to cover the maintenance margin is calculated as follows: Amount to cover the minimum maintenance margin = (market value of the securities x maintenance margin) - the capital of the investor, Therefore, an investor needs at least $ 15,000 of equity capital (the $ 60,000 market value of the securities multiplied by the 25% maintenance margin) in his account to be eligible for a margin. But they only have $ 10,000 of equity, resulting in a $ 5,000 shortfall: ($ 60,000 x 25%) - $ 10,000.

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