Action Alerts PLUS is a registered trademark of TheStreet, Inc. The margin call occurs when the value of securities purchased on margin drop below a certain point and reduce the overall value of the account below the maintenance margin. The "Bunker Hunt Day" crash of the silver market on Silver Thursday , March 27, 1980 is one such example.
You decide to open a margin account with a brokerage. It is a notification from your broker that you are in danger of the possibility of having some or all of your positions forcibly closed, or liquidated.. The limit level is calculated by dividing your equity by the required margin and multiplying by 100%. When a margin call happens, the brokerage will demand add funds or securities to the margin account to get back over the maintenance margin. In a case like this, your best option is to start selling some of the stock in the account.So in this specific instance, the margin account contains $172,500 and your equity is $47,500.
Keep money and/or other easily liquefied assets available and saved for if you do face a margin call to avoid the aftermath of being unable to pay it. Of that, $62,500 is your original investment, and is 1/3 of the amount in the account. What is a margin call, what happens if you are unable to pay it and what should you do to avoid it?A margin call is what occurs when an investment incurs enough losses that the investor's margin account goes below a certain amount, known as the maintenance margin. The brokerage reports your debt to the various credit agencies, and your And even with all that damage, there's also the distinct possibility of a brokerage filing a lawsuit against you, taking up severe time and money.The easiest way to avoid a margin call is to, well, not open a margin account. You may have to sell stocks and other securities you have from other brokerages just to cover the debt.Struggling to pay back the growing debt could have major consequences on the entirety of your finances. The account now has $172,500 in it. With a margin account, the investor and the broker start off investing the same amount in securities. Margin serves as the good faith deposit that keeps an exchange's clearinghouse running smoothly. But if you are seen as dependable and likely to add to the account and re-reach that threshold, you're likely to get an alert.But that is important to remember, and why the risk of having a margin call issued is so dangerous to investors: the brokerage has no incentive to help you put money back into the account or give you time to find the funds. An investor with multiple accounts at that brokerage may have to sell the assets in those accounts to cover the debt. How much will you have to sell? Margin call definition, a demand from a brokerage house to a customer that more money or securities be deposited in his or her margin account when the amount in it falls below that stipulated as necessary to cover the stock purchased. Dictionary.com Unabridged
If we use that $250,000 margin account from the above example, and that investor fails to make their margin call, suddenly they could sustain six figures of debt.Being unable to pay back your debt to a brokerage can have massive consequences, depending on your situation. Definition of margin call in the Medical Dictionary by The Free Dictionary The margin call is the mechanism for the exchange that allows it to stay in business and act as the buyer to every seller and the seller to every buyer. Definition of Margin call. A margin call is a ticking time bomb, and your broker probably isn't going to give you an extension.
So if you want to avoid the hardships of a margin call, not opening a margin account is the simplest way to go.But if you still want to open one, even if there are no guaranteed methods (you can't control whether a stock declines, after all) there are ways you can try to minimize the risk as best you can. The losses sustained in this period can then become debt you owe, meaning failure to make your margin call is just the beginning of the losses for the unlucky investor. Bonds don't have quite the growth potential that stocks do because they're far less volatile, but that lack of volatility also makes them less likely to fall as far as stocks can in a downturn market.The most important thing for investors considering a margin account is to be aware. That means dividing 4,250 by 0.3.To bring yourself back to the maintenance margin you would have to sell off at least $14,166.67 of stock, creating a margin account with $158,333.33, $47,500 of which is your equity.You may also consider selling other stocks you have to make the margin call, or selling other assets that could be valuable enough to help.If this happens to you, you're going to want to sell those stocks as soon as humanly possible.