Margin-calls happens when the value of your securities declines to the point where they no longer meet the required margin requirements set by your broker or exchange. The broker will issue one when this happens, which requires you to deposit additional funds into your account to meet those requirements. You have to promptly respond to the margin call, or else your brokerage firm has the right to sell off your securities without notifying you first.
What is a Margin Account?
Through a margin account, investors can borrow money from their brokerage firm to purchase securities on credit.
What is a Margin-Call?
It is a demand from your brokerage firm for more cash or other collateral so that you can continue to hold a particular investment. If you don’t have enough money, your broker will sell some of your securities to raise funds. According to the experts at SoFi, “The margin call usually follows a loss in the value of investments bought with borrowed money from a brokerage, known as margin debt.”
Does a Broker Have the Right to Liquidate Your Account if You Get a Margin-Call On Your Investments?
Yes, but with a little bit of understanding about how margin accounts work, you will understand why your broker has that right.
What Types of Accounts Can Be Subject to a Margin-Call?
- Margin accounts,
- Cash accounts,
- Pension plans
There is a risk of a margin call occurring in any of these accounts when an account’s equity falls below a certain level that your broker or stock exchange has set up.
Are There Any Rules and Regulations Surrounding Margin-Calls?
Yes. There are two regulations most commonly discussed surrounding margin calls: Regulation T and Securities Exchange Act Rule 15c3-3. These rules specify how much leverage a brokerage firm can offer and how much cash customers must keep in their accounts, depending on what type of account they have (margin or non-margin).
Can I Avoid a Margin-Call by Using Cash in My Investment Account, Instead of Selling Assets When the Market Tanks?
Generally speaking, no. Selling your investments when they decline in value, just because you’re worried about a margin call, is not a good idea.
How Do Investors Know What Level Their Assets Need to Reach Before They Trigger a Margin-Call?
Margin calls are triggered when an investor’s available margin is below a certain level as determined by their broker. This action can occur at any time during normal market conditions. This is essentially an urgent request for additional funds, given that you can borrow against your position on stock exchanges by around 70%. If a margin call isn’t met within one business day, investors may be forced to sell assets immediately to meet those obligations.
Why Might an Investor Want More Than Just Cash in Their Account Before Getting a Margin-Call?
A trader may want more capital on hand for market volatility. If a trader has enough cash in their account, they can better afford to be nimble with their trading because they don’t have to worry about getting a margin call.
A margin call occurs when a position you’ve opened with your brokerage exceeds agreed-upon limits. Clients must deposit additional funds into their accounts during a margin call or face liquidation of some or all positions.