What do you do when there is a margin call?

The two most common ways to meet a margin call are: 

  • Depositing funds equal or greater than the margin call amount 
  • Selling investments to meet the margin call 

Let’s look at both these scenarios with an example.  

Say you have a $250 maintenance margin call as shown below: 

margin call scenario: $250 margin call

Scenario 1: Depositing Funds 

You deposit $250 of cash into your account to meet the margin call requirement.  

margin call scenario: deposit $250

Your margin loan balance will reduce from $10,000 to $9,750 after you deposit $250 cash into your margin account and your account is no longer in a margin call. 

Scenario 2: Selling Investments 

When selling investments to meet a margin call, the amount that you need to sell depends on the margin requirement rates of the securities being sold.  

To keep it simple, let’s assume all the securities have a 25% maintenance requirement rate. You can use this formula to determine the amount that needs to be sold to meet the margin call of $250: 

Amount to be sold = Margin call amount / maintenance requirement rate 

In our example, to meet a $250 margin call, you will need to sell $1,000 worth of securities which is $250/0.25. Once you sell your securities, your portfolio value will reduce by $1,000 and your cash balance will increase by $1,000 and you’re no longer in a margin call as shown below: 

margin call scenario: selling investments to cover margin call

Alternatively, the $1,000 in your cash balance after selling investments can also be used to pay down your margin loan balance as follows: 

margin call scnenario: use cash balance to cover margin call

Learn more about margin calls at M1.

 

If you have further questions, please contact us.

 

All investing involves risk, including the risk of losing the money you invest. Borrowing on margin can add to these risks, and you should learn more before borrowing. M1 Borrow available on margin accounts with at least $2,000 invested. Not available for all account types including retirement, custodial and some trust accounts.  Margin rates subject to change. 

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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