What Is a Margin Call?
A margin call happens when the value of an investor's equity in a leveraged account drops below the broker's maintenance requirement. Buying on margin means borrowing from the broker against the securities in the account, and the broker requires a cushion of investor equity to protect its loan. When losses eat into that cushion, the broker demands more collateral.
In the US, Regulation T requires investors to put up at least 50% of a stock purchase in initial margin, and FINRA sets a maintenance minimum of 25% equity, though most brokers require 30% to 40% or more. Volatile or concentrated positions often carry house requirements well above the regulatory floor.
How a Margin Call Works
Consider an investor who buys $20,000 of stock using $10,000 of their own cash and a $10,000 margin loan. If the position falls to $13,000, the loan is still $10,000, so equity is down to $3,000, or about 23% of the position's value. With a 30% maintenance requirement, the account needs $3,900 of equity, so the broker issues a margin call for the $900 shortfall.
The investor can respond by depositing cash, adding fully paid securities, or selling positions to pay down the loan. Brokers typically allow anywhere from a few hours to a few days to meet a call, but most margin agreements let the broker sell the client's holdings immediately and without notice if it judges the risk too high. Forced liquidation often happens at the worst possible prices, locking in losses near market bottoms.
Why Margin Calls Matter
Margin calls transmit stress through the whole financial system, not just individual accounts. When prices fall broadly, leveraged investors everywhere receive calls at the same time, and their forced selling drives prices lower still, triggering the next round of calls. This deleveraging spiral amplified the 1929 crash, the 2008 crisis, and the March 2020 selloff.
The concept scales up to institutions. Hedge funds face margin calls from their prime brokers, and derivatives users must post variation margin as positions move against them. Archegos Capital collapsed in 2021 precisely because it could not meet margin calls on swap positions, saddling its banks with more than $10 billion in losses. Understanding margin mechanics is essential for any markets or risk role.
