A margin call is a broker’s demand for an investor to deposit additional funds or securities to cover potential losses in a margin account.
A margin call occurs when the value of an investor’s margin account falls below the broker’s required minimum maintenance margin. It is a demand from the broker to restore the account value by depositing more cash or securities to meet the minimum margin requirements. Margin accounts allow investors to borrow funds from a broker to purchase securities, leveraging their investment. However, this also exposes them to greater risk if the securities' value declines. When the equity in the margin account dips below the maintenance threshold due to market fluctuations or losses, the broker issues a margin call to mitigate risk. Failure to meet a margin call can result in the broker liquidating the investor’s assets to recoup the loan.
Margin calls directly impact investment strategy and risk management, as they enforce discipline around leverage usage. In wealth management contexts, maintaining appropriate margin levels protects family office portfolios from forced asset sales at unfavorable prices, which can disrupt long-term strategies. Margin calls also affect liquidity planning since unexpected cash requirements to meet margin calls could strain available capital. Additionally, margin calls can create taxable events if positions are liquidated, so anticipating and managing margin exposure supports more efficient tax planning and governance. Properly understanding margin calls helps advisors safeguard portfolios and maintain strategic flexibility.
Suppose an investor has $50,000 in a margin account and borrows $50,000 from the broker to buy $100,000 worth of securities. If the value of those securities drops to $80,000, the equity in the account is now $30,000 ($80,000 - $50,000). If the maintenance margin is 30%, the required equity should be $24,000 (30% of $80,000). Since $30,000 is above $24,000, no margin call is issued. However, if the securities fall to $70,000, equity is $20,000 ($70,000 - $50,000), which is below the $21,000 maintenance margin (30% of $70,000), triggering a margin call to restore equity by $1,000.
Margin Call vs Margin Debt
Margin call is the actual demand to add funds or securities to a margin account when equity falls below maintenance requirements, while margin debt represents the total amount borrowed by the investor against securities held in the margin account. Margin debt is the leverage used, and margin calls occur as a risk control mechanism related to that leverage.
What triggers a margin call?
A margin call is triggered when the equity in a margin account falls below the broker’s required maintenance margin due to a decline in the value of the securities purchased with borrowed funds.
What happens if I don’t respond to a margin call?
If you fail to meet a margin call by depositing more funds or securities, the broker may liquidate your assets in the account to cover the loan, which could result in losses and taxable events.
How can I avoid margin calls in my portfolio?
To avoid margin calls, maintain sufficient equity in margin accounts, monitor your portfolio regularly for market risks, and avoid over-leveraging your positions beyond your risk tolerance and liquidity capacity.
