A margin call, also known as house call, is a notice from a securities firm to an investor who is required to add funds or securities to the account to meet the minimum requirements for a margin account. Insufficient margin is usually due to changes in the market and a drop in the market value of the investor’s stock. If the investor is unable to meet the margin call, the securities firm may force the investor to close out the position to cover the margin. The minimum margin requirements are set by the U.S. Federal Reserve, so they are also known as Federal Reserve notices.
Key features of margin call:
- Margin calls are triggered by factors such as account value, margin loan and maintenance margin. Following the formula below, you can check when will a margin call be triggered as the stock price varies: Account Value = (Margin Loan) / (1 – Maintenance Margin %)
- The minimum margin requirements have been set by the U.S. Federal Reserve to enable the nation’s central bank to enforce its order. As a result, individual investors may be forced by their brokers to sell assets or deposit funds in spite of specific market price to meet the margin call. Some companies may require investors to keep at least 25% of the total value of their securities as margin.
Due to losing trades, there may be insufficient funds or the total value of the securities runs low in a margin account, which often leads to margin calls.