A margin call is when a broker requires an investor to deposit additional funds into their account.
A broker will do this to get the margin account returned to the minimum maintenance margin.
This will happen if the account value falls below the broker’s required minimum value.
To bring the margin back to the required level the investor must deposit more money in to the account.
What Is Free/Usable Margin
If you were to open an account and deposit $10,000, you will see the $10,000 in the “Equity” column of your Account.
The used margin will be $0.00 as you have not used any yet, therefore the usable margin will be $10,000.
The usable/free margin will always be equal to the equity minus the used margin.
It is the equity that is used to determine what the usable margin is, not the Balance .
It is also your equity that will determine if and when margin call is reached.
Example Of A Margin Call
If an investor were to buy securities for $200,000 using $100,000 of their own money and $100,000 from a broker, this is using margin.
The investor’s equity is equal to the market value of securities minus borrowed funds from the broker.
As the investor borrowed $100,000 this would mean the investors equity as a percentage is 50%.
The investor’s broker also has a maintenance margin of 25%.
Federal law established a minimum maintenance margin of 25%, however the maintenance margin percentage can vary among brokers.
When the investor’s equity falls below the minimum maintenance margin they will then receive a margin call.
The value of the purchased securities falls to $120,000.
This means the investor’s equity is now $20,000.
Investors equity = $120,000 market value – borrowed funds of $100,000 or 16.67%.
The investors equity is now below the brokers maintenance margin of 25%.
The investor will now receive a margin call requiring the investor to make a deposit to at least meet the maintenance margin.
Deposit required = (Market Value of Securities x Maintenance Margin) – Investor’s Equity
So the deposit required by the broker would be $10,000, ($120,000 x 25%) – $20,000.
If the investor does not deposit the required $10,000 then the broker can liquidate securities to keep the account in line with the maintenance margin.