# Understanding Margin Calls: What Triggers Them and How to Respond

> **Definition**
>
> A margin call is a broker’s demand that an investor who has borrowed money to buy securities must deposit more money or securities into their account so it’s brought up a minimum value.

A margin call is a broker's demand for an investor to deposit additional funds or securities into their [margin account](https://www.investopedia.com/terms/m/marginaccount.asp) when the account's equity falls below the broker's required [maintenance level](https://www.investopedia.com/terms/m/maintenancemargin.asp). Margin calls are typically triggered when the value of the securities in the account declines due to market downturns or volatility. They require immediate action; investors must add funds or sell assets to restore the account's value. Failure to meet a margin call can lead the broker to liquidate assets to cover the shortfall.

### Key Takeaways

*   A margin call occurs when an investor's equity in a margin account falls below the broker's required minimum, prompting the need for additional funds or securities to restore the account balance.
*   Meeting a margin call can be done by depositing cash or marginable securities, or by liquidating other holdings to cover the deficiency, with the time frame generally ranging from two to five days.
*   Investors can mitigate the risk of margin calls by maintaining a diversified portfolio, regularly monitoring account equity, and keeping sufficient cash or securities in the account.
*   Investing on margin carries inherent risks, including the potential to lose more than the initial investment due to the borrowed capital, highlighting the importance of using protective stop orders and keeping leverage manageable.  
    

![Margin Call](https://www.investopedia.com/thmb/XW8G_NQeI7tyFLb-nuhKanw8xD8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Margincall-1b75e4a92ac441fd9ca5676f5494a70b.jpg)

*— Investopedia / Michela Buttignol*

## What Triggers a Margin Call?

An investor is buying on margin when they pay to buy and sell securities using a combination of their own funds and money borrowed from a broker. An investor’s equity in the investment is equal to the [market value](https://www.investopedia.com/terms/m/marketvalue.asp) of the securities minus the borrowed amount.

> **Important**
>
> A margin call is triggered when the investor’s equity as a percentage of the total market value of securities falls below a certain required level called the maintenance margin.

The [New York Stock Exchange](https://www.investopedia.com/articles/basics/03/103103.asp) (NYSE) and the [Financial Industry Regulatory Authority](https://www.investopedia.com/terms/f/finra.asp) (FINRA), the regulatory body for the majority of securities firms operating in the United States, both require that investors maintain an equity level of 25% of the total value of their securities when buying on margin.

Some brokerage firms may require a higher maintenance requirement, such as 50%. It is at their discretion.

Margin calls can occur at any time due to a drop in account value but they're more likely to happen during periods of market volatility.

## Margin Call Scenario: What to Expect and How to Respond

Here's an example of how a margin account's value drops enough to trigger a margin call.

## Strategies to Respond to a Margin Call

The investor typically has two to five days to act if their account value drops to a level where a margin call is issued by their broker. These are the options for doing so using the margin call example above:

1.  Deposit $200 in cash into the account.
2.  Deposit $285 of fully paid-for marginable securities into the account. This amount is derived by dividing the required funds of $200 by 1 less the 30% equity requirement: 200/(1-.30) = $285.
3.  Use a combination of the above two options.
4.  Sell other securities to obtain the needed cash.

If you can't meet a margin call, a broker might sell your assets to meet the minimum requirement. The broker can sell assets without your approval and may charge a commission. You're responsible for any losses.  

### Note

The amount of a margin loan depends on a security's purchase price and is therefore a fixed amount. But the dollar amount determined by the maintenance margin requirement is based on the current account value, not on the initial purchase price. That's why it fluctuates.

## Proactive Steps to Prevent Margin Calls

Think carefully about whether you need a margin account before opening one. Most long-term investors don’t need margin buying for good returns, and these loans accrue interest.

To manage and prepare for a margin call, consider these strategies:

*   Make sure cash is available to place in your account immediately. Consider keeping it in an interest-earning account at the same brokerage.
*   Build a [well-diversified portfolio](https://www.investopedia.com/investing/importance-diversification/). This may help limit margin calls because a single position is less likely to decrease the account value.
*   Monitor your open positions, equity, and margin loans regularly, even daily.
*   Create a custom-made alert at some comfortable level above the margin maintenance requirement. Deposit funds or securities to increase your equity if your account falls to it.
*   Take care of it immediately if you receive a margin call.

Use protective stop orders to limit losses and keep enough cash and securities in your account to avoid margin calls.

## Is It Risky to Trade Stocks on Margin?

It's certainly riskier to trade stocks with margin than without it because trading stocks on margin is trading with borrowed money. Leveraged trades are riskier than unleveraged ones. The biggest risk with margin trading is that investors can lose more than they've invested.

## How Can a Margin Call Be Met?

A margin call is issued by the broker when there's a margin deficiency in the trader’s margin account. The trader has to either deposit cash or marginable securities in the margin account or liquidate some securities in the account to rectify a margin deficiency.

## Can a Trader Delay Meeting a Margin Call?

A margin call must be satisfied immediately and without any delay. Some brokers may give you two to five days to meet the margin call but the fine print of a standard margin account agreement will generally state that the broker has the right to liquidate any or all securities or other assets held in the margin account at its discretion and without prior notice. It's best to meet a margin call and rectify the margin deficiency promptly to prevent such forced liquidation.  

## How Can I Manage the Risks Associated With Trading on Margin?

Measures to manage the risks associated with trading on margin include:

*   Using [stop-loss orders](https://www.investopedia.com/terms/s/stop-lossorder.asp) to limit losses
*   Keeping the amount of leverage to manageable levels
*   Borrowing against a diversified portfolio to [reduce the probability of a margin call](https://www.investopedia.com/terms/c/crossmargining.asp) which is significantly more likely with a single stock

## Does the Total Level of Margin Debt Have an Impact on Market Volatility?

A high level of margin debt can exacerbate market volatility. Clients are forced to sell stocks to meet margin calls during steep market declines. This can lead to a vicious circle where intense selling pressure drives stock prices lower, triggering more margin calls and more selling.

## The Bottom Line

Buying on margin isn't suitable for every investor because it involves borrowing money and meeting both [initial and maintenance margin](https://www.investopedia.com/ask/answers/052115/what-are-different-types-margin-calls.asp) requirements. While it can amplify potential returns, it also increases the risk of substantial losses, especially in volatile markets.

Margin calls can force investors to deposit additional funds or sell assets, sometimes at unfavorable prices, and failure to meet them can result in forced liquidation by the broker. To manage these risks, investors should monitor their account balances closely, keep extra funds available, and consider using stop-loss orders.  

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Understanding Margin Accounts](https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_marginaccount)."
>     
> 2.  Financial Industry Regulatory Authority. “[Margin Account Requirements](https://www.finra.org/rules-guidance/key-topics/margin-accounts).”
>     
> 3.  U.S. Securities and Exchange Commission. “[Notice of Filing of Proposed Rule Change by the New York Stock Exchange, Inc. to Amend NYSE Rule 431 ('Margin Requirements')](https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking/sr-nyse-99-47).”
>     
> 4.  U.S. Securities and Exchange Commission. "[Margin: Borrowing Money to Pay for Stocks](https://www.sec.gov/reportspubs/investor-publications/investorpubsmarginhtm.html)."