A. Trading on margin offers a variety of potential benefits, as well as some additional risks, including margin calls, which is a demand from your brokerage firm to increase the amount of equity in your account.
How to satisfy a margin call?
Brokerage firms are not required to notify customers of margin calls, although most do. In some cases, a firm may simply sell shares without notifying the customer in order to bring the account equity up to or over the minimum house maintenance requirements. This usually happens in volatile markets or when there is an extreme movement of a concentrated position. Still, in many cases investors have an opportunity to choose the method and time at which they meet a margin call.
If an investor has a $2,000 margin call, here are 3 options to use in order to meet a margin call:
- Deposit cash: simply deposit $2,000 into her account.
- Deposit marginable securities: deposit fully paid-for shares of stock as additional collateral for the margin loan. To determine how many shares would be necessary to meet a $2,000 margin call, divide $2,000 by the loan value of the stock you plan to deposit. The loan value is equal to 100% minus the maintenance requirement for that stock. Assuming the maintenance requirement is 30%, you can divide $2,000 by 0.70 to arrive at the figure of $2,857. That's the amount of marginable stock you must deposit to cover a $2,000 margin call.
- Sell shares of stock: Similar to the calculation for depositing securities, you multiply the value of the stock sold by the maintenance requirement for the shares that remain in the account. Assuming a 30% maintenance requirement, you can sell $6,670 worth of the company stock to satisfy the $2,000 margin call.