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What is a margin call?
I am learning about investing in the stock market and would like to know more about what a "margin call" means. Can you please explain this?
A margin call arises when the equity (value of the assets you put in) drops below an agreed lending ratio. If your share price falls below the agreed limits you are asked to put more money or shares in to bring equity value back up to the agreed ratio. This is a margin call. You could use your own money, sell some shares or, if you can, borrow more money. Margin calls can be upsetting if your finances are tight.Here's an example. You bought $40,000 worth of shares by borrowing $20,000 and paying $20,000 from your own funds. If the market value of the share portfolio decreases to $30,000 your equity position falls to $10,000 ($30,000 - $20,000 = $10,000). Assuming a maintenance requirement of 25%, you would need to have $7500 equity (25% of $30,000 = $7500). Therefore, there would be no margin call in this situation because your $10,000 of equity is greater than the maintenance margin of $7500.
But let's assume the maintenance requirement of your brokerage is 40% instead of 25%. In this case, your equity of $10,000 is less than the maintenance margin of $12,000 (40% of $30,000 = $12,000). Therefore the brokerage may issue you a margin call.