All About Margin Call

A margin call is a concept in trading on margin, where investors borrow funds from brokers to buy securities. When the value of an investor’s holdings falls below a required threshold, the broker demands additional funds or securities to maintain the position. This is known as a margin call.

This article explains margin calls in detail, including how they occur, the risks involved, and strategies to prevent them.

In margin trading, account positions are subject to minimum equity requirements set by the broker. When these requirements are not met due to changes in market value, a specific account-level action is triggered.

Margin call definition / margin call meaning:
A margin call occurs when the equity in a margin account falls below the broker’s prescribed maintenance margin, prompting a requirement for additional funds or eligible securities to restore the required margin level.

This situation typically arises due to one or more of the following factors:

• A decline in the market value of securities held in the margin account

• An increase in the broker’s maintenance margin requirements

• Higher leverage amplifying the impact of price movements on account equity

The margin call mechanism functions as a risk management process that allows brokers to maintain adequate coverage against funds extended through margin trading.

A margin call is determined by comparing the equity available in a margin account with the maintenance margin requirement set by the broker or exchange. The calculation focuses on how much of the position value is funded by the account holder versus borrowed funds.

The calculation generally follows this structure:

Equity in Margin Account
= Market Value of Securities − Borrowed Amount

Maintenance Margin Requirement
= Maintenance Margin Percentage × Market Value of Securities

A margin call arises when the equity in the margin account falls below the required maintenance margin.

This relationship can be expressed as:

Market Value of Securities − Borrowed Amount < Maintenance Margin % × Market Value of Securities

Alternatively, equity as a percentage of market value can be calculated as:

Equity Percentage
= (Equity ÷ Market Value of Securities) × 100

If this equity percentage falls below the prescribed maintenance margin percentage, the account is considered to have breached margin requirements.

This calculation framework explains how price movements and leverage affect margin levels and how margin calls are identified within margin trading systems.

Here is how margin trading operates and the key elements to keep in mind:

• Initial Margin: The upfront amount investors must deposit to open a leveraged position. This is often a percentage of the total trade value.

• Maintenance Margin: The minimum equity required to keep a position open. It is usually lower than the initial margin but varies by broker and asset.

• Leverage: Borrowed money that increases the size of an investment beyond the investor’s own capital.

If the market value of securities falls, the equity shrinks. Once it dips below the maintenance margin, a margin call is triggered.

Situations where an account becomes margin called typically arise from changes in market value, leverage levels, or margin requirements, rather than from a single isolated action. As outlined earlier, a margin call occurs when account equity falls below the maintenance threshold set by the broker.

Common contributing factors include:

Declining stock prices

When the market value of securities purchased using margin decreases, the value of the collateral held against the loan also falls. This reduction in equity can result in the account being margin called.

Increased margin requirements during volatile conditions

Increased margin requirements may be introduced by brokers in response to market volatility or regulatory updates. When maintenance thresholds are revised upward, the equity required to maintain open positions also changes, which can result in accounts being called margin.

High leverage exposure

Positions involving higher levels of borrowed funds are more sensitive to price fluctuations. Even modest market movements can significantly alter equity levels in leveraged accounts.

Sudden market movements

Sharp price changes triggered by macroeconomic events, corporate announcements, or broader market disruptions can quickly affect collateral values and margin availability.

Together, these factors explain how margin calls are triggered within margin trading frameworks and how market and regulatory conditions influence margin requirements.

The implications of a margin call determine how positions are handled when margin requirements are not maintained, making it relevant to understand the possible outcomes associated with margin-based trading arrangements.

Common consequences include:

• Forced liquidation - Securities in the margin account may be sold automatically by the broker to restore the required margin level.

• Erosion of equity - Losses may increase as declining prices reduce the account’s equity beyond the initial margin amount.

• Restricted account control - Brokers are permitted to liquidate positions without prior approval to safeguard outstanding exposure.

• Operational pressure - Margin calls can create time-sensitive funding or collateral requirements within the trading account.

These outcomes highlight how margin mechanisms operate under adverse conditions and underscore the role of monitoring margin levels and account equity within margin trading frameworks.

Margin calls are typically influenced by how margin exposure, market movements, and account equity interact over time. Ongoing risk oversight plays a role in limiting the erosion of account equity during adverse price movements and periods of volatility.

Common factors associated with the likelihood of a margin call include:

• Maintaining equity levels: Lower equity relative to maintenance margin requirements increases sensitivity to price fluctuations.

• Monitoring leverage exposure: Higher leverage amplifies the impact of market movements on account equity.

• Tracking position values: Changes in security prices directly affect collateral value and available margin.

• Applying exit mechanisms: The absence of predefined exit levels can allow losses to accumulate beyond maintenance thresholds.

• Diversifying holdings: Concentrated positions may lead to sharper equity declines during sector-specific movements.

• Accounting for broker requirements: Changes in margin policies or maintenance levels can alter margin availability without changes in position size.

Regular review of margin positions and disciplined exposure management are structural aspects of margin trading that influence the frequency and severity of margin calls.

Imagine an investor buys shares worth ₹1,00,000 by investing ₹50,000 of their own money and borrowing ₹50,000 on margin. If the share price falls 20%, the total value becomes ₹80,000, and the investor’s equity drops to ₹30,000. If the maintenance margin is 30%, a margin call will occur because the equity is below the required amount (₹24,000 minimum in this case).

The investor will need to add funds or securities to meet the margin call or face forced liquidation.

Margin call outcomes depend on account conditions, margin requirements, and market movements. Common responses observed in margin accounts include:

• Provision of additional margin

Additional funds or securities may be added to restore the required margin level.

• Adjustment of leveraged positions

Positions may be reduced to bring account equity back within maintenance limits.

• Portfolio reassessment

Changes to position composition or leverage levels may occur following repeated margin calls.

Margin calls function as a risk control mechanism within margin trading frameworks. The use of margin increases exposure by allowing leveraged positions, while also requiring adherence to prescribed equity and maintenance requirements. This section has outlined how margin calls arise, the conditions under which they are triggered, and their role within regulated trading systems.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.