What is a Margin Call?

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DEFINITION:

If the securities you use as collateral decline in price, your company may make a margin call. This is a request to repay all or part of the loan with cash, a deposit of securities outside your account, or by selling securities in your account.

Understanding a margin call

An investment on margin means that your brokerage firm lends you cash using assets in your account as collateral to buy securities. A margin call is a request by the broker to you to repay the loan in whole or in part with cash, a deposit of securities outside your account (permitted by some brokers), or by selling securities in your account. Margin requirements apply to the account, not to an individual security holding. However, margin requirements may vary by security.

EXAMPLE

An example of margin: imagine you buy $2,000 worth of stock, but only put up $1,000 of that margin or security – a 50% margin or 2x leverage. Your $2,000 purchase is now paid for by the $1,000 you paid in cash on the transaction plus the $1,000 your broker loaned you. The broker lends you money and uses the stock as collateral. If the value of the stock drops to the point where your equity in the account falls below the required margin, your broker will issue a margin call and ask you to liquidate the position or deposit cash or securities to replenish the equity in the account. If you do not act in time, your broker may liquidate your position.

Takeaway

Margin is the deposit you make against the loans you took out to finance your position. If your position loses money, you must make additional deposits if your account falls below a certain minimum capital.

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