How Margin Calls Work

What Is a Margin Call?

A margin call is your broker's demand for additional funds when your account equity falls below required levels. If you can't meet the call, your broker will sell your securities—often at the worst possible time.

How Margin Works: A Quick Refresher

When you trade on margin, you borrow money from your broker to buy securities. Regulation T allows you to borrow up to 50% of a purchase price initially. So with $10,000, you could buy $20,000 worth of stock.

Your equity = Value of securities - Amount borrowed
Your margin ratio = Equity ÷ Value of securities

The Two Types of Margin Requirements

1. Initial Margin (Reg T): 50%

When you first buy on margin, you must put up at least 50% of the purchase price. This is federally mandated.

2. Maintenance Margin: 25-40%

After purchase, your equity must stay above a minimum level—typically 25% (FINRA minimum) to 40% (broker requirement). When it drops below this, you get a margin call.

Margin Call Example

What Happens During a Margin Call

1. Notification: Your broker alerts you (email, app notification, sometimes phone)
2. Deadline: You typically have 2-5 days to meet the call (but brokers can demand immediate action)
3. Your options: Deposit cash, deposit securities, or sell positions
4. Forced liquidation: If you don't act, your broker sells securities to bring you into compliance

The Brutal Truth About Forced Liquidation

When your broker liquidates, they:

• Choose which securities to sell (not you)
• Sell at market price (often at lows during crashes)
• May sell more than necessary to create a buffer
• Don't need your permission

This typically happens at the worst time—during market crashes when everyone is panicking and prices are lowest.

How to Avoid Margin Calls

1. Keep a Cash Buffer

Never use your full margin capacity. If you have $100,000 in buying power, use $60,000-$70,000 max. The cushion protects you during downturns.

2. Monitor Your Margin Ratio

Know your broker's maintenance requirement and stay well above it. If they require 30%, try to stay above 40%.

3. Diversify Your Holdings

Concentrated positions are riskier. One stock dropping 50% hits harder than a diversified portfolio dropping 20%.

4. Avoid Volatile Stocks on Margin

Meme stocks, small caps, and high-beta names can swing 20%+ in a day. On margin, that volatility is amplified.

5. Set Alerts

Set portfolio alerts at 10% and 20% down so you have warning before a margin call triggers.

6. Have Liquidity Ready

Keep cash in a high-yield savings account that you can transfer quickly if needed. Don't let a margin call force you to sell at the bottom.

Special Situations

Pattern Day Trader Rules

Day traders face a $25,000 minimum equity requirement. If you fall below, you can't day trade until you restore the balance—effectively a specialized margin call.

Concentrated Stock Requirements

Brokers may require higher maintenance margins for concentrated positions (e.g., 40-50% for a single stock position exceeding a threshold).

What If You Can't Meet a Margin Call?

If you can't deposit funds:

• Your broker will liquidate positions
• You're still responsible for any remaining debt
• Your account may be restricted
• In extreme cases, you could owe more than you deposited

The Bottom Line

Margin is a powerful tool that can amplify gains—but it amplifies losses too. Margin calls force you to sell at the worst times, locking in losses that might have recovered.

If you use margin:

• Stay well below your maximum
• Keep emergency cash available
• Understand that forced liquidation is brutal
• Consider whether the extra risk is worth it