Margin Call
A margin call occurs when the percentage of an investor’s equity in a margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with a combination of the investor’s own money and money borrowed from the investor’s broker.A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that the value of the investor's equity (and the account value) rises to a minimum value indicated by the maintenance requirement.A margin call is usually an indicator that securities held in the margin account have decreased in value. When a margin call occurs, the investor must choose to either deposit additional funds or marginable securities in the account or sell some of the assets held in their account.
Definition
A margin call occurs when an investor's equity percentage in a margin account falls below the broker's required amount. The margin account contains the investor's own funds and the securities purchased with borrowed funds from the broker. A margin call specifically refers to the broker's demand for the investor to deposit additional funds or securities into the account to raise the investor's net worth (and account value) to the minimum level indicated by the maintenance requirement. A margin call usually means that the value of the securities held in the margin account has decreased. When a margin call occurs, the investor must choose to either deposit additional funds or securities into the account or sell some of the assets held in the account.
Origin
The concept of a margin call originated in the early 20th century in the U.S. financial markets. As the stock market developed, investors began using borrowed funds for investments, a practice known as margin trading. After the stock market crash of 1929, the U.S. Securities and Exchange Commission (SEC) was established in 1934 and began to strictly regulate margin trading to prevent excessive speculation and systemic risk.
Categories and Characteristics
Margin calls can be divided into two categories: initial margin and maintenance margin. The initial margin is the minimum amount of funds that an investor must deposit into the account when engaging in margin trading. The maintenance margin is the minimum account net worth percentage that an investor must maintain during the trading process. The initial margin is usually higher to ensure that the investor has enough funds to cope with market fluctuations, while the maintenance margin is lower but still requires the investor to add funds during market volatility.
Specific Cases
Case 1: Suppose Investor A has 100,000 yuan in their margin account, with 50,000 yuan being their own funds and another 50,000 yuan borrowed from the broker. One day, the market drops, causing the account's total value to fall to 80,000 yuan. At this point, the broker's maintenance margin requirement is 30%. Therefore, Investor A needs to raise the account's net worth (the portion of their own funds) to 24,000 yuan (30% of 80,000 yuan) or face a margin call.
Case 2: Investor B holds stocks worth 200,000 yuan in their margin account, with 100,000 yuan being borrowed funds. Due to market fluctuations, the stock value drops to 150,000 yuan. The broker's maintenance margin requirement is 25%. Therefore, Investor B needs to raise the account's net worth to 37,500 yuan (25% of 150,000 yuan) or face a margin call.
Common Questions
1. What is a margin account?
A margin account is an account where investors can borrow funds to trade securities. Investors need to deposit a certain percentage of their own funds, with the remaining portion provided by the broker.
2. What are the risks of a margin call?
The main risk of a margin call is that market fluctuations may require investors to frequently add funds, or they may be forced to sell assets to meet the requirements, potentially leading to losses.
