![]() ![]() ![]() In that case, the broker will make a margin call requesting a cash deposit or liquidation of securities, so there is no longer a shortfall. Suppose your margin account value falls below the set maintenance requirement. What are the Consequences of Failing to Meet a Margin Call? In this second case, the account value is short $4,000, as the maintenance margin is just 20% rather than the required 25% - so the broker will soon issue a formal margin call to ensure a deposit is made or securities are sold to make up the difference. the deficit that must be addressed promptly, is $4,000. Moreover, $16,000 divided by $80,000 equals 20%, which does NOT sufficiently meet the minimum requirement of 25%. If we deduct the margin loan of $60,000 from the account value, the investor equity is $16,000. We’ll use the same assumptions in the next exercise as in the previous example, except for the margin account value.Īfter the investor placed riskier bets on options that were not unsuccessful, the account value has declined from $120,000 to $76,000. The 25% maintenance margin is still met, so there is no margin call. If the market value of your margin account declines to $80,000, your equity is only worth $20,000 after deducting the $60,000 margin loan. The maintenance margin is calculated based on the market value of the securities held minus the margin loan, which is $60,000 in our example. Therefore, your account value must remain above $80,000 at all times - otherwise, you are at risk of receiving a margin call. Suppose you opened up a margin account and deposited $60,000 of your own cash.Īt a 50% margin, $60,000 is borrowed on margin, so the total funding available to be spent on securities is $120,000, which you decided to spend entirely on a portfolio of stocks.Īssuming a 50% initial margin and 25% maintenance margin, we can enter our numbers into the margin call price formula. The formula for calculating the price at which a margin call is expected is shown below. ![]() Learn More → Hedge Fund Primer Margin Call Price Formula With that said, a margin call implies that the securities purchased (and thus, the account value) have declined in value to where the minimum threshold is no longer met.Ĭertain brokers send out warnings to investors trading on margin if an account is close to no longer meeting a requirement, but margin calls specifically request the investor to either: Maintenance Margin: The minimum percentage that investors must maintain in their margin accounts for their positions to remain open.Initial Margin: The minimum percentage that investors must contribute before purchasing an asset using the margin loan.leverage) to make investments comes with certain requirements, namely the initial and maintenance margin. However, the optionality to utilize borrowed capital (i.e. investors can borrow funds from a brokerage to make investments instead of using their money.įor instance, if an investor has contributed $10,000 of their own capital to the account, which has a margin of 50% - the investor can purchase up to $20,000 worth of securities because the remaining $10,000 is borrowed from the broker. The Margin Call Price refers to the minimum equity percentage expected to be held in a margin account before resulting in a margin call.Ī margin call is triggered when an investor trading on margin has an account value below the minimum requirement.Ī margin account is a method for investors to purchase securities on margin, i.e.
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