What is a Margin Call?

The term “Margin Call” also sometimes known as a “Fed Call” or a “Maintenance Call” refers to a situation involving buying on margin, which means taking out a loan from a broker to cover a larger investment than could otherwise be afforded. The “margin call” will usually happen when the level of true capital owned by the investor dips below a specific percentage of the investment total. It could also occur when a broker alters their requirements for the minimum margin, which is the lowest percentage of the investment that needs to be maintained in direct equity.

If an account drops below the maintenance requirement, a broker will make the margin call to the investor to ask for more cash deposited into the account. If the investor cannot meet the margin call, the broker sells the securities to boost account equity up to, or above, the maintenance requirement.

A margin call does not signify a major upheaval in the realm of the financial markets, and there is also no unfavorable reflection on any investor who becomes subjected to a margin call. On the contrary, margin calls are a basic and normal part of the process for people who choose to buy some investments on margin.

Naturally, there are many people who will decide to keep their invested equities at a far higher level than the minimum margin requirements, simply to avoid dealing with the possibility of a margin call. Other investors maintain investment accounts right at the minimum, meaning that they may have a margin call with every relevant drop in the market.

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