A margin call is a demand from a broker to a client to deposit additional money or securities into a margin account to bring it up to the minimum maintenance margin. Margin calls occur when the value of the account falls below this minimum level. This can happen because of a decline in the value of the securities held in the account.
Margin accounts are used by investors to borrow money from their broker to buy securities. This is known as buying on margin. The investor uses the securities in their account as collateral for the loan. The minimum maintenance margin is typically set by regulation, but the broker can require a higher margin level.
If a margin call is not met by the investor depositing more money or securities into their account, the broker has the right to sell the securities in the account to meet the margin requirement. The broker can do this without the investor’s approval and can choose which securities to sell. This can result in significant losses for the investor.
In other words, margin calls are mechanisms designed to reduce the risk exposure of the broker if the market moves against the investor’s position.
This term “Margin Call” is also the title of a 2011 movie which depicts the early stages of the 2008 financial crisis from the perspective of an investment bank.
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