If an investor doesn't have sufficient funds for a stock purchase, he can buy securities on the margin. Although brokerage firms do extend credit to investors in order to make stock purchases, investors must maintain a minimum level of account equity. The difference between actual equity and the minimum required equity is the margin call.
Margin Call Overview
A margin call is the requirement to maintain a certain percentage of equity in your brokerage account. If you want to buy stock but your equity account has fallen below the minimum balance, your brokerage firm will demand a deposit of funds or securities to cover the margin call. If you fail to cover the margin call within an allotted amount of time, the firm will liquidate securities on your behalf to cover the balance.
Minimum Margin Account Amounts
When you have a margin account with a broker, the minimum margin represents the amount of funds that you must deposit with your broker that allows you to borrow from your margin account to purchase stock. This amount changes from investor to investor as well as factors such as market volatility and supply and demand.
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The leverage that margin accounts offer give you greater buying power than you'd have if you used only your cash resources. But the downside is that buying on margin can also potentially increase your losses.
Buying on Margin
If you don't have enough cash to make a stock purchase, you may be able to make a purchase on the margin. Buying stock on margin means that your brokerage firm is lending you money to complete the purchase. The Federal Reserve Board requires investors to have an initial margin of 50 percent and a maintenance margin of 30 percent.
For example, to make an initial securities purchase of $5,000, you must have at least 50 percent, or $2,500, in your account. Now that your account balance is $5,000, you must maintain 30 percent of the balance, or $1,500 in cash, to meet the maintenance margin requirement.
Calculating Call Margin
The margin call is the difference between the current equity balance in your account and how much equity you need to maintain. Say that you have a $10,000 balance of securities in your brokerage account, but only $2,000 is in cash. If your have a 30 percent maintenance margin, you must maintain $3,000 cash in your account. In this situation, the margin call is $3,000 less $2,000, or $1,000.
Covering Margin Call
To cover the margin call, the investor can deposit cash in the amount of the margin call. Alternatively, the investor can sell enough securities so that the balance of the equity meets the margin requirement.
Say the investor has a $2,000 cash balance in the account and does not want to deposit more funds. The $2,000 comprises 30 percent of a $6,667 account balance. If the current value of securities is $10,000, the investor could sell $3,333 in securities to bring the account balance to $6,667 and meet the maintenance margin requirements.