Investing Trading Day Trading What Is a Margin Call? By TJ Porter Updated on September 27, 2022 Reviewed by Gordon Scott In This Article View All In This Article How a Margin Call Works Example of Margin Call Avoiding a Margin Call Frequently Asked Questions (FAQs) Photo: Fizkes / Getty Images Definition A margin call is when an investor’s brokerage makes an immediate demand to increase funds or equities in your margin account—a type of account in which the brokerage lends the investor cash to buy securities. This can happen when the account’s total amount falls below requirements set by the brokerage’s in-house rules or federal regulators. Key Takeaways Margin requirements limit how much investors can borrow, and set requirements for the equity they must maintain after buying securities with margin.If an investor’s equity falls below the required amount, a margin call occurs.The investor must respond to the margin call by selling shares or depositing funds to avoid forced sale of their investments.FINRA regulations limit margin at purchase to at most 50%, and maintenance margin requirements to at least 25%. How a Margin Call Works A margin call works by forcing an investor to bring a margin account to required minimums if the investor winds up with too much debt compared to the value of the securities in their brokerage account. A margin call may result from too low of an account balance, a drop in equity value, or other violation of a brokerage’s margin account requirements. Brokers are free to set their own rules, but under regulations set by the Financial Industry Regulatory Authority (FINRA) and the Federal Reserve Board, a broker may lend up to 50% of a security’s price on margin. After the purchase, they’ll keep track of the value of your securities compared to debt. The minimum amount of equity you must maintain in your account is called the maintenance margin. While 25% is the lowest requirement allowed by law, many brokers set it at 30% or 40%. However, some securities could even require 75% to 100%. Brokers have automated systems to monitor customer equity and programs that will issue an alarm, notification, or action if that equity drops below the requirements. When you face a margin call, you can respond by selling securities to meet the maintenance margin requirement or by adding cash to your account. If you don’t do either, your brokerage can sell your investments without your permission to pay off your debt. The broker can even do so without contacting you. Note You likely won’t be able to buy any more securities until you meet the margin call requirements. Margin requirements protect both the investor and brokerage companies, and shield the market from volatility and bubbles caused by massive speculation in securities. Rampant borrowing for speculation was a contributing factor to the 1929 stock market collapse. Margin calls mean brokers won’t lose massive amounts from unpaid loans. They also, to a point, protect investors from catastrophic losses by forcing them to sell out of positions they can’t afford to hold. Imagine a situation where someone could borrow hundreds of thousands or millions of dollars to invest in a company. If that company’s share price dropped by just a few dollars, that investor could easily lose more money than they have. This could leave investors bankrupt and brokers losing large amounts of money. Note Rules can differ for certain types of traders or securities. For example, foreign exchange traders can leverage their trades up to 50:1 for major currency pairs. Example of Margin Call To determine whether you’re meeting the maintenance margin requirement, multiply your account balance by the maintenance margin. If your equity (what you own) is lower than that amount, your broker will initiate a margin call. Let’s say John wants to invest in XYZ Company, which is trading at $100 per share. John has $50,000 to invest and wants to buy as many shares as possible. Using margin, he can buy 1,000 shares with his own money and $50,000 on margin from his broker. In total, John now owns $100,000 worth of shares. XYZ Company’s stock then drops in price to $60 per share. John will have just $10,000 in equity compared to the $60,000 in securities in his account. This will trigger a margin call because: $60,000 x 0.25 = $15,000 (the amount of equity John is required to have) $10,000 is less than $15,000 John must make a decision, which could include depositing or transferring cash or more marginable XYZ stock, or closing out positions to bring his account to the required level of $15,000. If John does nothing, his brokerage may liquidate his shares of XYZ Company without contacting him. Avoiding a Margin Call If you’re concerned a margin call might occur soon due to market volatility or a rapidly dropping stock price, you have a few options—but you also need to consider tax implications that could result. To avoid margin calls in the future, plan how you’ll react to a drop in the stock’s price and how you’ll handle a potential margin call. This may mean borrowing less than allowed, keeping a personal margin higher than the brokerage’s margin, and diversifying and monitoring your portfolio more closely. Investors can also use cash accounts to pay for the securities bought. Cash investment accounts may come with additional restrictions, however. For example, you can’t buy and sell a security before paying for it. Frequently Asked Questions (FAQs) What is a day-trade margin call? Day-trading margin calls, or DT margin calls, are margin calls for people who day trade or buy and sell their positions on the same day. If you’re a pattern day trader, special rules apply to your margin account, including minimum equity requirements. Read your brokerage’s instructions on how to avoid generating DT margin calls. What is a margin account? When investors use a margin account, they can borrow money from their broker to increase their purchasing power. This borrowed money is called margin. Margin is useful because it can increase an investor’s potential returns. However, it also increases potential losses and increases the broker’s risk because it has lent money to someone using margin to buy potentially volatile assets. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. FINRA. "Margin Regulation." U.S. Securities and Exchange Commission. "Investor Bulletin: Understanding Margin Accounts." Charles Schwab. "Your First Margin Call." Oanda. "Spreads and Margins."