Legal Definitions - margin call

A margin call is a demand from a brokerage firm to an investor to deposit additional funds or securities into their margin account. This demand occurs when the value of the investor's securities, which were purchased with borrowed money (on margin), falls below a certain required level. The purpose of a margin call is to ensure that the investor maintains a minimum amount of equity in their account to cover potential losses and protect the brokerage firm's loan.

If an investor fails to meet a margin call by depositing the required funds or securities, the brokerage firm has the right to sell some or all of the investor's securities without their consent to bring the account back to the required margin level. This can result in significant losses for the investor.

Here are a few examples to illustrate how a margin call works:

• Example 1: Stock Market Investment

  Sarah decides to invest in shares of a promising technology company, "InnovateTech Inc.," using a margin account. She buys $20,000 worth of shares, putting down $10,000 of her own money and borrowing the remaining $10,000 from her broker. A few weeks later, InnovateTech Inc. announces disappointing quarterly earnings, causing its stock price to drop sharply. As a result, the total value of Sarah's shares falls to $14,000. Her broker then issues a margin call, notifying her that her account's equity has fallen below the required maintenance margin and she needs to deposit an additional $3,000 to bring her account back into compliance. If Sarah doesn't deposit the funds, her broker may sell some of her InnovateTech Inc. shares to cover the shortfall.

  This example illustrates a margin call because the broker is demanding additional collateral (cash) from Sarah to mitigate the increased risk of her leveraged investment due to the declining stock value.

• Example 2: Commodities Futures Trading

  David is a commodities trader who uses a margin account to speculate on the price of crude oil futures contracts. He takes a position betting that oil prices will rise. Unexpectedly, a major global economic slowdown is announced, causing a significant and rapid decline in crude oil prices. As the value of David's futures contracts plummets, his brokerage firm issues a margin call, requiring him to deposit a substantial amount of additional money into his account immediately. This is to cover the potential losses on his open positions, as the market has moved sharply against his leveraged trade.

  This demonstrates a margin call in the context of commodities trading, where the broker requires more capital to maintain the necessary margin level when the market moves unfavorably against David's leveraged position.

• Example 3: Forex (Foreign Exchange) Trading

  Emily is a retail forex trader who uses a margin account to trade currency pairs. She opens a leveraged position, buying Euros and selling US Dollars (EUR/USD), expecting the Euro to strengthen. However, an unexpected political crisis in Europe causes the Euro to weaken significantly against the US Dollar, moving sharply against Emily's trade. Her forex broker sends her an urgent notification, a margin call, demanding she deposit additional funds into her account within a very short timeframe. If she fails to do so, the broker will automatically close some or all of her open positions to prevent further losses and protect their loan.

  This example shows a margin call in currency trading, where the broker requires more capital to cover the increased risk of a leveraged position that has lost significant value due to adverse market movements.