What Is a Margin Call?

Daniel Penzing
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What Is a Margin Loan?

A margin loan is a loan that uses an asset such as a stock, bond, or mutual fund as collateral. The loan value is then calculated by subtracting the current market price of the asset from the loan amount. If the collateral decreases in value, in the eyes of the lender, it could result in a margin call, where the lender requests that the borrower make additional payments or sell some of the assets.

Why Would Anybody Do That?

Although a margin call is a costly one, it’s not always a good one to avoid. To make sure you don’t fall into that trap, here’s what a margin call is and why you might want to rethink avoiding it.

To put it simply, a margin call is a demand to put up more money by a broker or other lender. The demand is only made as a last resort. Once a lender has an idea of the size of your position, it will put a stop to any losses that exceed a certain level, called the maintenance level.

If the maintenance level is exceeded, the broker, company, or bank will request you deposit more money into the account. As a result, a reduction in the account balance will trigger a margin call. Once the margin call is triggered, your position can be liquidated immediately.

Who is a margin call targeted at? Anybody that is leveraging their capital in the markets. The idea is that cutting your losses at the right moment can help protect you from further damage. While it’s not always a good idea to cut your losses, it’s a practice that can be pretty powerful.

Now, About That Margin Call

Step 1: Adjust the down payment. You can decrease the amount you pay towards the price of the house every month by increasing the amount you pay towards a down payment. A larger down payment also means that you will have more equity in the house, which means it will be easier to get a loan.

Step 2: Increase your income. If you don’t have access to additional income, there are temporary options that you can use to increase your total income, such as getting a second job or increasing your hours at work. However, a more permanent solution would be to increase your income through a raise, a side hustle, a new job, or a promotion.

Step 3: Increase your credit score. Increase your credit score by paying off your existing debt (slowly) and by making on-time payments on your mortgage. It is also a good idea to use free credit monitoring services to ensure that your Social Security number isn’t being used to open credit accounts.

Step 4: Lower your spending. You can finance your spending by taking out a loan and using the loan to make your purchases. However, this is a terrible idea, as it will negatively impact your credit score. Instead of using credit, switch to a cash-only lifestyle and save up the money that you need in order to purchase the things you want.

That's Why Most People Don't Do It

Let's get started. Typically when we talk about it, we're discussing equity markets. And 'it' is a 'margin call.'

You may be wondering why this is even a discussion. Isn't the concept straightforward?

It's straightforward in principal. A margin call is when you have an unrealized loss in your portfolio and your brokerage firm asks you to put up more cash.

But when it happens, it often triggers a cascade of emotions: frustration, anger, and anxiety.

You would have to go through some sort of analysis before. A margin call can happen to anyone in a down market.

A lot of people are unable to pull it off, and it happens all the time. Many others are unable to cope with the emotions of a margin call and they do things that are impulsive and that they later regret.

All of these are different signs of the same thing, and there is only one right way to handle the situation.

How to Avoid Margin Calls

A margin call is when your brokerage firm requires you to put in more money in order to avoid getting your account “frozen.” A margin call is triggered when the equity in your account, defined as your stock price minus your loan balance, falls below a minimum acceptable level.

Under normal market conditions, a margin call is intended to help you reinstate your account to the minimum levels set by your brokerage firm. If the market immediately pops back up and your equity is back above the minimum levels, the margin call can be removed. Most margin calls are removed automatically after market hours as the market opens.

Before You Invest in a Margin Trading Account

A margin trading account is a strategy used by investors that attempt to increase the stocks they trade based on the money that is provided by their brokerage firm. It is important to remember that every margin account is different. But it also has to conform to the rules set by the Securities and Exchange Commissions. You should look at your brokerage firm and understand what their margin requirements are.

Some of the specifics of trading on margin vary from brokerage firm to brokerage firm because they are governed by the SEC. These people also set the minimum required equity in an account at a certain level. Each brokerage firm contains levels different from one another.