A margin call is a notice from your broker that you must increase the funds in a margin account. Not all investors use margin accounts. Only those investors who plan on borrowing money from the broker using securities as collateral will have a margin account. You can continue to trade from this account and make trades on borrowed money so long as you have minimum collateral present. The key is your total account, including the assets you own as investments, cannot fall below the broker's margin. If so, you must either deposit more cash with the broker or sell off assets.

Types of Margin Accounts

There are several ways to calculate margin. Your broker will use one of these methods, so it is important to know which method will be used up front.

  • The most common method is liquidating margin. This calculates how much money you would have if you liquidated a position right now. If you borrowed money in order to short a stock, you may owe money according to your current liquidating margin. 
  • A second method is known as maintenance margin. With this model, your account is debited or credited each day based on the profit or loss you sustained over the previous day. This is a more complicated way to calculate margin.
  • Additional margin is not used in margin calls; it is the total margin you would need to cover a worst-case scenario. This is like insurance on your margin account. Essentially, you must never be in a position where your account could end up negative on the whole. Even if you owe on some short positions, your long positions would be substantial enough to overcome this debt.

Maintenance Requirements

There are two figures your broker will quote when it comes to minimum margin requirements. The first is the initial margin. This is the total sum of assets you must have in an account in order to begin borrowing from the broker. This is your initial collateral. The second margin is your maintenance margin. This amount is lower than the original margin so your account can rise and fall with the market without burdening you with margin calls. If the maintenance requirement is too high compared to the initial requirement, you would constantly find your account slipping below the minimum.

Margin Call

Even if your account remains active for several years, you may enter a period when you slip below the maintenance margin. This is when your broker would issue a margin call. For example, if the total of all assets in your account is $100,000, and your broker's margin is $125,000, you cannot borrow any more from your broker. In fact, you must repay your broker $25,000 on a margin call. You can do this in two ways: you can put additional cash into your portfolio to purchase $25,000 of securities with your own money, or you can sell off $25,000 in debts you may have to your broker. If you fail to take action within the window of time your broker presents, your account may be closed and your assets liquidated.

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