What Is A Margin Call?

What Is A Margin Call?

A margin call is a critical concept in the realm of financial trading, particularly in the context of margin accounts.

When an investor trades on margin, they borrow funds from a broker to amplify their buying power. However, this strategy comes with its fair share of risks.

A margin call occurs when the value of the securities in the investor's margin account falls below a predetermined level, known as the maintenance margin. At this point, the broker demands the investor deposit additional funds or securities to bring the account's value back above the maintenance margin.

If the trader fails to meet the margin call requirements, the broker will be forced to liquidate their assets in order to cover for the margin. 

Margin calls are a protective mechanism employed by brokers to mitigate the risk of losses and ensure that investors can fulfill their financial obligations in leveraged trading scenarios.

If you are a beginner trader and would like to know more about what a margin call is and how it works, this investfox guide is for you. 

How Margin Calls Work


A margin call is a process triggered when the value of securities in a margin account falls below a certain level, which is specified by the broker and can vary between different brokerage firms. 

Here’s how the process of margin trading typically works up to the point of a margin call:

  • Opening a Margin Account: A trader open a margin account with a brokerage, allowing them to borrow funds to trade securities, leveraging their buying power
  • Establishing Initial Margin: The trader must meet the initial margin requirement, a percentage of the total trade value that acts as collateral for the borrowed funds
  • Executing Trades: The trader uses the borrowed funds to execute trades, potentially amplifying their gains or losses
  • Maintenance Margin Requirement: Brokers set a maintenance margin requirement, a minimum account value that must be maintained to continue holding the leveraged positions
  • Monitoring Account Value: The brokerage continuously monitors the account's value in real-time based on the current market prices of the securities held
  • Margin Call Trigger: If the account value falls below the maintenance margin level due to market fluctuations or trading losses, a margin call is triggered
  • Broker Notification: The broker issues a margin call, notifying the trader that they must deposit additional funds or securities promptly to bring the account value back above the maintenance margin
  • Response By Trader: The trader has options - they can deposit additional funds, sell securities to raise cash, or a combination of both to meet the margin call
  • Forced Liquidation: If the trader fails to meet the margin call within the specified timeframe, the broker may initiate forced liquidation—selling some or all of the trader's positions to cover the outstanding debt
  • Account Reassessment: After meeting the margin call, the account is reassessed, and the trader can resume using the account. If the forced liquidation occurred, the tradermay have a reduced portfolio and increased debt

Risks Associated With Margin Trading

As evident from the process described above, margin trading can be a quite risky strategy that requires experience and a clearly defined action plan from the trader to avoid major losses and insolvency issues. 

In addition to the clear financial implications of failing to meet margin requirements, a prolonged delay between margin payments can also result in legal action from the brokerage, as they need to recoup their portion of the margin. 

Furthermore, the brokerage can blacklist the trader, which bars them from opening a new account with the broker in the future. 

Effective risk management is essential for traders engaged in margin trading to mitigate these potential financial setbacks. This includes choosing a conservative degree of leverage and picking less volatile trades when doing so on margin. 

Key Takeaways From What Is A Margin Call

  • A margin call happens when a trader’s account balance falls below the margin requirement level, after which the broker may liquidate the trader’s assets
  • If the trader does not deposit more funds to pay off the margin, the broker will lock the account until sufficient funds are available, and may even resort to blacklisting the trader
  • After meeting the margin call, the account is reassessed by the broker and the trader can continue using it 
  • A prolonged failure to meet the margin requirement may result in legal action from the brokerage against the trader 

FAQ On Margin Call

Is a margin call bad in trading?

A margin call is not inherently bad, but it signals that a trader's leveraged positions are at risk. It provides an opportunity to address the shortfall by depositing more funds or liquidating assets. Properly managing margin calls is crucial to avoid forced liquidation and substantial losses.

What happens during a margin call?

During a margin call, a brokerage notifies a trader that their margin account has fallen below the maintenance level. The trader must deposit additional funds or sell assets promptly. Failure may lead to forced liquidation to cover the debt.

Should you trade on margin?

Trading on margin can amplify both gains and losses. It's suitable for experienced investors who understand the risks and have a solid risk management strategy. Beginners should approach margin trading cautiously or gain more experience before considering it.