A margin call occurs when a securities broker requests additional funds or stock as collateral from a customer who is financing a securities purchase. This typically occurs when the market value of the securities is decreasing, serving as a reminder for the customer to repay their debt.
A margin call is a request from a securities broker to a customer to provide additional funds or stocks as collateral when the broker finances the purchase of securities. This request typically occurs when the market prices of the securities are decreasing. It is also referred to as a maintenance call. For instance, John obtained $10,000 worth of stocks on margin from his broker, who mandated him to provide $5,000 as collateral. However, as the market prices of the stocks declined, John received a margin call from his broker, demanding that he contribute more funds to cover the loss. Similarly, when Sarah purchased a house, she obtained a mortgage from a bank, which required her to make a down payment of 20% of the house’s value. If the value of the house decreases, the bank may request Sarah to provide additional funds as collateral, similar to a margin call. These examples demonstrate the functioning of a margin call. When the value of securities or property decreases, the broker or bank may require the customer to provide more funds as collateral to mitigate potential losses. This measure ensures that the broker or bank is safeguarded against any potential risks.
A margin call is a demand from a broker for an investor to deposit additional money or securities into their account to meet minimum margin requirements.
A margin call occurs when the value of securities in an investor’s account falls below a certain threshold, as determined by the broker’s margin requirements.
If you don’t meet a margin call, your broker may liquidate some or all of your securities to cover the shortfall. This can result in significant losses for the investor.
To avoid a margin call, you can either deposit additional funds into your account or sell some of your securities to increase your account’s equity.
In some cases, a broker may take legal action against an investor who fails to meet a margin call, especially if the investor’s actions result in losses for the broker.
Yes, margin calls are subject to regulations set by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Brokers are required to provide investors with notice before issuing a margin call, but the specific requirements for notice may vary depending on the broker’s policies and the type of account.
You can dispute a margin call if you believe it was issued in error or if you have evidence that your account meets the margin requirements. It’s important to communicate with your broker and provide any necessary documentation to support your case.
Trading on margin carries significant risks, including the potential for margin calls, increased losses, and the need to pay interest on borrowed funds.
If you receive a margin call and are unsure of your rights and obligations, it’s advisable to seek legal advice from a qualified attorney who specializes in securities law.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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