What is Margin Call?

2213 reads · Last updated: December 5, 2024

A margin call occurs when the percentage of an investor’s equity in a margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with a combination of the investor’s own money and money borrowed from the investor’s broker.A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that the value of the investor's equity (and the account value) rises to a minimum value indicated by the maintenance requirement.A margin call is usually an indicator that securities held in the margin account have decreased in value. When a margin call occurs, the investor must choose to either deposit additional funds or marginable securities in the account or sell some of the assets held in their account.

Definition

A margin call occurs when an investor's equity percentage in a margin account falls below the broker's required amount. The margin account contains the investor's own funds and securities purchased with borrowed funds from the broker. A margin call specifically refers to the broker's demand for the investor to deposit additional funds or securities into the account to raise the investor's net worth (and account value) to the minimum level indicated by the maintenance requirement. A margin call usually means that the value of the securities held in the margin account has decreased. When a margin call occurs, the investor must choose to deposit additional funds or securities into the account or sell some of the assets held in the account.

Origin

The concept of a margin call originated in the early 20th century in the United States when the stock market became popular, and investors could purchase stocks on margin. After the 1929 stock market crash, the U.S. Securities and Exchange Commission (SEC) was established in 1934 and began regulating margin trading to protect investors and market stability.

Categories and Features

Margin calls are primarily divided into two categories: initial margin and maintenance margin. The initial margin is the minimum amount that must be deposited when an investor first purchases securities, while the maintenance margin is the minimum amount that must be maintained in the account. Features of margin calls include high risk, as market volatility can lead to a rapid decline in the value of securities, triggering a margin call. Investors need to closely monitor market dynamics to avoid being forced to sell assets.

Case Studies

Case Study 1: During the 2008 financial crisis, many investors faced margin call challenges. As the market plummeted, the value of investors' margin accounts quickly shrank, leading to numerous margin call notifications. Many investors were forced to sell assets to meet the requirements, further exacerbating the market downturn. Case Study 2: In the 2021 GameStop event, some investors received margin call notifications due to the extreme volatility in stock prices. With the rapid rise and fall of stock prices, investors needed to react quickly to avoid losses.

Common Issues

Common issues investors face include how to quickly raise funds to meet margin call requirements and how to protect their investments during market volatility. A common misconception is that margin calls only occur during market downturns, but in reality, extreme market fluctuations can also trigger margin calls.

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