A margin call is issued when the equity in your Individual/Joint Brokerage Account or Trust Account that your Margin Loan is from falls below the maintenance margin requirements. There are two primary scenarios that could cause this:
Market depreciation
Higher Margin Requirements
Market depreciation
If the equity in your account drops below the minimum margin requirement set by your brokerage, it could trigger a margin call. Market depreciation is usually the most common cause for lower equity, but any fees or interest charges could also reduce your account equity.
Higher Margin Requirements
The margin requirements for your portfolio could also increase due to the following:
Rebalancing: If securities with higher margin requirements are underweight in your portfolio, relative to securities with lower requirements, rebalancing an account with a Margin Loan could trigger a margin call. This most commonly happens when you add higher-risk investments to your portfolio.
Margin Requirement Changes: Your brokerage or clearing firm can increase the margin requirements on specific securities based on volatility and other factors.
Let’s look at a few scenarios using an example
Say your account value is $50,000, which consists of $49,000 invested in securities and a $1,000 cash. Then with the standard 25% margin requirement rate you borrow $10,000 using an M1 Margin Loan.
In the above example, the account has $40,000 of equity compared to the margin requirement of $12,500 resulting in $27,750 of excess equity.
Scenario 1: Market Depreciation
When you know the maintenance margin requirement rate of a portfolio (in this case 25%), the following formula will tell you exactly how much the portfolio value would have to depreciate to trigger a margin call:
(Margin Loan balance-cash) / (1 – margin requirement rate)
In our example, that translates to:
($10,000-$1,000) / (1 - 0.25) = $13,333.34
This means that the $49,000 portfolio value would have to drop below $12,000 to trigger a margin call (which is over a 70% drop!).
Let’s look at the numbers right before the margin call when the portfolio value drops to $13,000, and $1,000 stays uninvested as cash.
We see that excess equity remains positive; therefore, no margin call is issued.
When the portfolio value drops to $11,000 (below the previously calculated $12,000 threshold), we see that the excess equity is negative and a margin call for $750 would be issued.
In the above example, you would need to deposit cash or sell securities to meet the margin call.
Scenario 2: Higher Margin Requirements
Now let’s review an example where the portfolio value does not change, but you update your portfolio to include highly volatile stocks with a 100% margin requirement rate and rebalance.
In this case the maintenance requirement increases from $12,500 in the first scenario to $50,000, causing the excess equity to drop and resulting in a $10,000 maintenance margin call.
Brokerage accounts on the M1 platform are either fully disclosed to APEX Clearing or cleared through M1 Finance LLC. Please look at your account statement to determine how your account is cleared.
All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future performance. Using margin can add to these risks. Users utilizing APEX cleared margin accounts should review the APEX margin account risk disclosure before borrowing. Users utilizing M1 cleared margin accounts should review the M1 margin account risk disclosure before borrowing. M1 Margin Loans are available on margin accounts with at least $2,000 invested per account. Not available for Retirement or Custodial accounts. Margin rates may vary.
Brokerage products and services are offered by M1 Finance LLC, Member FINRA / SIPC, and a wholly owned subsidiary of M1 Holdings, Inc.
All examples above are for informational purposes and should not be considered an offer to buy or sell certain securities. M1 does not provide investment advice.
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