Margin Calls, From the First Notice to a Forced Sale

The first notice is usually short. It says the account has a maintenance call, gives an amount, names a date, and lists the ways to meet it. Nothing on it explains the amount. The sum behind it takes a minute, and knowing it before the day a notice lands is the difference between choosing how to answer and letting the broker choose for you.

What sets one off

The trigger decides what kind of call it is.

A maintenance call comes when equity falls below the maintenance requirement. FINRA Rule 4210 sets the maintenance requirement floor for long stock at 25% of market value, and brokers are free to set a house level above it, on the whole account or on a single volatile holding. Most calls in a falling market are this kind. Because a house level can be raised on one stock without warning, a maintenance call can also arrive on a day the price barely moved, simply because the broker decided the holding now needs more collateral than it did the week before.

A Regulation T call comes from the purchase side. The Federal Reserve Board’s rule requires your own money to cover half of a new margin purchase, and if a trade goes through without that, the account owes the difference by a set date. It has nothing to do with the price falling.

The example below is a maintenance call.

Working out the shortfall

Take a hypothetical position that has already had a rough few weeks.

Equity is at 22.5%. The floor is 25%. The broker wants $500.

Meeting it with a deposit

Cash is the clean way out. Deposit $500 and it pays down the loan to $15,000, leaving equity at $5,000 on a $20,000 position, exactly 25%, with every share still in the account and still working for you if the stock recovers.

Marginable securities count too, at loan value.

Exactly 25% is still standing right on the line, and a further dip of any size puts the account back in a call. Sending more than the minimum buys room.

Meeting it by selling

Selling looks cheaper. It takes more stock than you might expect.

A sale of stock pays down the loan dollar for dollar. Sell $1 of stock and the market value drops by $1 while the loan also drops by $1, so equity stays exactly where it was, and the only thing that moves is the requirement, which falls by 25 cents because it is a quarter of whatever the position is worth. To close a $500 gap, the requirement has to shrink by $500.

A $500 call cost you $2,000 of stock. That assumes the shares sell at today’s price, too.

The general rule is shortfall divided by the requirement rate. At a higher house level the same equity produces a bigger call and a far bigger sale.

A quarter of the position gone. If the stock keeps falling while you sell, each sale has to be bigger, and a sale near the low locks in the loss that caused the call.

What the broker may do without you

The agreement gives the lender most of the choices. It may liquidate without waiting for your reply, and in a fast market without sending the notice at all. It picks which positions go, which may not be the ones you would have sold, and it sets the deadline, which it can shorten.

It can also sell more than the minimum. Nothing obliges it to stop at $2,000, and a liquidation run in a hurry, at the open after a bad night, can take far more of the account than the call itself asked for.

A call you can see coming is cheaper to handle. The margin call calculator gives the share price at which any position would be called, and the margin call entry covers the variations in more detail. The answer on how to avoid a margin call lists the habits that keep an account out of one.

The last lesson turns this around: choose the fall you want to survive first, then work out how large a loan that allows.