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Maintenance margin explained

What is a margin call?

A margin call refers to a brokers call or demand to an investor utilizing margin for depositing additional securities or money. This is done to facilitate the margin account to rise till the minimum margin of maintenance. Margin calls take place due to your margin account value depressing to a certain level calculated by the respective brokers formula. This is also sometimes referred to as a fed call or maintenance call.

When is a margin call issued?

Prices do tend to fall rapidly in a volatile market. If the equity the difference between what you owe the broker and your securities value in your account makes a downward slide and reaches below the minimum maintenance margin, your brokerage is bound to issue a margin call. In this situation you have the option of either liquidating your position in the stock or adding more cash to that account. Let us assume you buy $20, 000 value of securities. You do this by borrowing from your brokerage $10, 000, and you manage the rest yourself. When the market value of the securities fall to $15, 000, the value of the equity in the account also lowers to $5, 000 ($15, 000 - $10, 000 = $5, 000). Now if the maintenance margin of your brokerage is 40%, which is (40% of $15, 000 = $6, 000), you will be issued a margin call since the value of equity in your account is less i.e. worth $5, 000.

What happens when you do not pay heed to a margin call?

The brokerage in this case, can sell the securities you own to increase the equity value in your account. Sometime he may not even consult you prior to selling. It is highly recommended that you carefully read the brokerages margin agreement prior to investing.

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