Quick definition A margin call is when your broker demands you deposit more money or sell positions because your account equity has fallen below the minimum required level. What it is Brokers set maintenance requirements: the minimum equity you must have. If your account falls below this level due to losses, the broker issues a margin call. You have a few hours (typically) to either: - Deposit more cash - Sell positions to raise cash - Accept forced liquidation Why it matters Margin calls force traders to realise losses at the worst times. When markets are falling and you are margined, a margin call forces you to sell at the bottom. Margin calls are one of the primary triggers of forced selling that can amplify market declines. Maintenance requirement Typical maintenance requirements: - Stocks: 25-30 percent (3x-4x leverage maximum) - Futures: varies by contract (often 10-20 percent) - Options: varies by type If your account has 10,000 dollars in stock positions and a 25 percent maintenance requirement, you must keep 2,500 dollars equity. If equity falls below 2,500 dollars, margin call. Forced liquidation If you do not meet a margin call, the broker force-liquidates your positions to meet the requirement. They sell positions without your permission. Force liquidations can be aggressive; brokers sell the most liquid positions first, not your worst positions. Practical example You have 10,000 dollars equity and 30,000 dollars in stock positions (3x leverage). Your maintenance requirement is 25 percent of 30,000 = 7,500 dollars. The stock market falls 20 percent. Your positions are now worth 24,000 dollars. Your equity is 24,000 - 20,000 (loan) = 4,000 dollars. Your equity (4,000) is now below your requirement (7,500). Margin call. You must either deposit 3,500 dollars or sell 14,000 dollars of positions. Prevention The best defence against margin calls is to use reasonable leverage. The most leveraged traders live closest to the margin call line. See also - Margin - Leverage - Maintenance Requirement - Forced Liquidation
