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Home » Forex Glossary » What is a Margin Call

What is a Margin Call

If you want to purchase securities but cannot cover the total cost, buying in a margin account allows you to tap into additional funds credited by your broker.  You will half to put up at least 50% and then maintain at least a minimum amount of equity throughout the life of the account.  Let’s say you want to buy 1,000 shares of XYZ stock on margin at $20 a share.  You must put down at least $10,000, half of the cost, and be ready to meet a margin call if the value of the stock drops below 25%, also known as regulation T requirement.  If XYZ stock drops to $10 a share, your $20,000 in equity will drop to $10,000 and your broker will issue you a margin call ((Equity $10,000) – (lended funds $10,000) should = (at least 25% of Equity $2,250)).  Since you have $0 of equity, you will have to deposit the full $2,250 to unfreeze your account.  Yeah that’s right.  Your account will be frozen if you violate minimum balance requirements, and your broker may require more than the federal reserve board’s 25%.  It’s not uncommon to see minimum balance requirements of up to 35 to 40%.  Margin accounts can be a great way to increase your purchasing power, but be sure you have some extra funds on the side to cover a margin call, should your stock not perform as you had planned.