When an investor’s margin account drops below a broker’s margin criteria, a margin call results between that investor’s broker and the trader. The broker demands that the trader either deposits additional capital or sells off preexisting securities to satisfy the minimum value required, otherwise known as the maintenance margin.
The primary driving force behind a margin call results when an investor’s securities held on margin have depreciated below a distinct value oftentimes expressed as a percentage.
The maintenance margin for traders investing in the FINRA and New York Stock Exchange (NYSE) is set to 25% of the net value of that trader’s securities although some investment brokerages may require between 30% to 40%.
Margin calls are triggered when the monetary account value of a trader’s account equity equals or is less than that broker’s maintenance margin requirement (MMR), whose formula may be denoted as:
Account Equity = (Margin Loan)/(1- MMR)
An example that could be applied would be if a trader’s margin account reflected a sum of $200,000. Half of which was the trader’s equity while the remaining $100,000 was put forth by the broker’s margin loan. Should the value of the account depreciate from $200,000 to $160,000 then that broker’s $100,000 margin loan is still active whereas your $100,000 equity stake has dwindled from $100,000 to $60,000. Now let’s say that the broker has a maintenance margin percentage of 30%. Fortunately for the trader, $60,000 is 37.5% of $160,000, so the trader won’t face a margin call unless the value of his equity stake was to fall below 30%.
Traders should be forewarned that if their account drops below maintenance margin then brokers can liquidate the trader’s assets to meet the allotted threshold. This is why traders oftentimes employ stop losses to mitigate losses and prevent prospective margin calls from occurring.
Should an investor be unable to pay off accrued debt as a result of a breach in maintenance margin, brokers have the right to report the trader’s debt to credit agencies which can damage that trader’s credit.