What Happens in a Margin Call, and Who Decides What Gets Sold

Put 10,000 of your own money into a margin account, borrow another 10,000 from the broker, and buy 400 shares of a stock at 50. Now let it slide. At about 33.33, a 25 percent maintenance requirement is breached, and below that line you are in a margin call.

Call it the call price. Most margin traders never work it out before they buy. It takes a minute.

The two rules underneath

Two separate requirements govern a margin account, and they apply at different moments.

Initial margin is set by the Federal Reserve’s Regulation T. For most stock purchases you must put up at least 50 percent of the purchase price yourself, which is why 10,000 of equity buys 20,000 of stock in the example above.

Maintenance margin applies after the purchase, every day the position is open. FINRA sets a minimum of 25 percent of the market value of long positions: your equity, which is the market value minus the loan, must stay at or above a quarter of what the positions are worth. Brokers commonly set a higher house requirement, sometimes much higher on volatile or concentrated positions, so the 25 percent figure is a floor and your broker’s number is the one that actually binds.

There is an entry ticket too. FINRA rules require at least 2,000 of equity to open margin trading, and your broker’s agreement may add minimums of its own.

Working out the call price

Equity falls faster than the stock does. The loan stays fixed while the market value shrinks, and that is leverage in one sentence.

Run that sum with your broker’s real requirement. The gap between the FINRA floor and a house rate matters, because it can drag the call price a long way up toward your entry, which turns an ordinary pullback into a forced sale on a position you thought had plenty of room.

What happens once you are below

Say the stock closes at 30. Market value is 12,000, the loan is still 10,000, and equity is 2,000. At 25 percent the requirement is 3,000, so the account is 1,000 short.

You now have a few ways to meet it. Deposit 1,000 in cash, which pays down the loan and lifts equity to exactly the requirement. Deposit marginable securities. Or sell stock, which is less efficient than it sounds, because every dollar of sale proceeds reduces the loan and the market value together, leaving equity where it was while shrinking the requirement by only a quarter of each dollar sold, so covering a 1,000 shortfall this way means selling about 4,000 of stock.

Here is the part that surprises people. The broker is allowed to sell positions in your account without contacting you first and without waiting for the stated deadline, and it chooses which positions go, at what time, and at whatever prices the market offers then. Margin agreements say this in writing. Some brokers send a notice and wait. Others liquidate the same day. You agreed to both possibilities when you signed.

Where margin calls go wrong

A gap through the call price. A stock that opens far below the prior close skips the zone where a deposit would have helped, and forced sales can then happen at prices that leave equity near zero or below it. Losing more than you deposited is possible, which is covered in whether you can lose more than you put in.

House requirements change. A broker can raise the requirement on a stock at short notice, which moves your call price upward overnight without the stock moving at all.

Concentration. One oversized holding, one bad open, one call.

Confusing margin with cash. The spending figure on screen includes borrowed money, so read what buying power actually measures before treating it as yours.

Checking it on your own account

Open the margin or balances page. Many platforms show a house requirement per holding along with an overall excess or deficit figure, and those two numbers, together with your loan balance and the size of your largest position, are everything you need to work the call price with the real percentage.

Short positions carry their own maintenance rules, and they fall outside this worked example.

Is the call price closer than a normal bad week? Then the position is too big. Traders who want to avoid the whole mechanism often start in a cash account and add margin later, once the arithmetic above is second nature.