Margin Call

A margin call occurs when your margin account falls below the broker’s required maintenance margin. You may need to add funds or sell securities to restore the required equity level.

• A margin call can occur when falling security prices reduce your account equity below the maintenance margin.
• You can respond by depositing cash, transferring securities, or selling holdings.
• Margin trading can increase both potential gains and losses because it involves borrowed funds.
• In the example below, a 25% maintenance margin applies to a ₹2,00,000 investment.
• A portfolio decline to ₹1,40,000 leaves ₹40,000 in investor equity, below the ₹50,000 requirement.
• If the required margin is not restored, the broker may liquidate positions.

• Keeping additional cash and regularly monitoring your account can help reduce the risk of a margin call.

  
  
  

A broker issues a margin call when the value of securities in your Margin Trading Facility (MTF) account falls below the required maintenance margin. The account contains securities purchased using your own funds and money borrowed from the broker.
A margin call usually indicates that the value of your pledged securities has declined due to market movements. To restore the required margin, you can add funds or sell some securities.
 

A margin call is triggered when the equity in your margin account falls below the predetermined maintenance margin. This can happen when the market value of your securities declines significantly.
When the value of your holdings falls, your equity may no longer be enough to cover the margin debt. The broker can then ask you to restore the required margin level.
For example, assume the initial margin requirement is 50%, and the maintenance margin is 25%. If you purchase securities worth ₹10,000, you contribute ₹5,000, while the remaining ₹5,000 is borrowed from the broker.
If the securities decline by 40%, their value falls to ₹6,000. Your equity becomes ₹1,000, which is below the required maintenance margin of ₹1,500. This triggers a margin call.
You must then deposit additional funds to restore the required equity. If the equity falls to zero, the broker may liquidate the securities to recover the outstanding margin debt.
 

The margin call price can be calculated using the following formula:

Margin Call Price = Initial Purchase Price × (1 − Initial Margin) ÷ (1 − Maintenance Margin)

Where:

• Initial purchase price: The cost of the security when purchased.
• Initial margin: The minimum percentage of the purchase price that you must pay upfront.
• Maintenance margin: The percentage of equity that must be maintained in the margin account.

This formula determines the price level at which a margin call would be triggered.

Interpretation:

If the stock price falls below ₹6,667, the investor will receive a margin call.

For example:

• At a stock price of ₹6,667, the broker’s loan represents 75%, or ₹5,000 of ₹6,667. The investor’s equity is 25%.

• If the price falls to ₹6,000, the broker’s share becomes 83.33%, based on ₹5,000 of ₹6,000. The investor is left with 16.67% equity.

  
  

Since the investor’s equity falls below the required 25%, a margin call is triggered.

If you receive a margin call, you need to restore your account to the required maintenance margin. You can consider the following options:

• Add funds: Infuse additional money into your trading account to reach the maintenance margin.
• Transfer securities: Move additional securities into the account to meet the required margin.
• Close trades: Sell or close positions to bridge the gap between your account equity and the required maintenance margin.

• Wait for portfolio recovery: You may wait for the portfolio value to increase before liquidation, subject to the broker’s applicable requirements and timelines.

  
  

Typically, you may have around five days after receiving a margin call to meet the maintenance margin. The actual time can be shorter depending on your account, broker, market conditions, and other factors.

If you fail to meet the margin requirement within the applicable timeframe, your broker may liquidate your portfolio without your permission.

Trading on margin involves additional risk, particularly for beginners. Like call and put options, margin trading can increase your exposure to market movements and may amplify both gains and losses.

A broker may issue a margin call in situations such as:

• Falling security value: A decline in the value of securities can reduce your account equity below the maintenance margin.
• Changing maintenance requirements: Brokers can have different maintenance margin requirements. These levels may also change during periods of market volatility or turbulence.
• Excessive borrowing: Taking on excessive borrowing can increase your exposure and make it easier for your account to fall below the required margin.

• Approaching the maintenance level: Brokers may notify you when your account approaches the required maintenance margin, giving you an opportunity to add funds.

  
  

Regularly tracking your account and market movements can help you identify when your equity is approaching the maintenance margin.

Receiving a margin call can create additional financial pressure. The simplest way to avoid one is to avoid margin trading, but you can also take steps to manage your exposure.

Keep additional cash reserves

Maintain additional funds in your account to cover market fluctuations. Unlike securities, cash retains a stable value and can provide a buffer when you need to meet margin requirements without immediately selling your holdings.

Diversify your portfolio

Consider spreading your investments across different assets, such as stocks, bonds, commodities, and derivatives. Diversification can reduce the impact of a sharp price movement in one security and lower the risk of breaching the maintenance margin.

Regularly monitor your account

Check your margin account regularly to see whether its value is approaching the maintenance margin. This gives you time to add funds or adjust your positions before a margin call is triggered.

Set a personal maintenance margin

Set your own maintenance threshold above the broker’s minimum requirement. If your account approaches this level, you can add funds or sell some positions before reaching the broker’s required margin level.

These measures can help you manage the risks associated with margin trading and maintain better control over your investments.

Read more: Margin trading 

• Add funds: Deposit cash to restore the required margin level and retain your positions.
• Sell securities: Liquidate part of your holdings to reduce your borrowed exposure.
• Reduce leverage: Limit excessive borrowing to reduce the risk of repeated margin calls.
• Review your portfolio: Consider less volatile assets to help stabilise your account equity.
• Act quickly: A delayed response may result in broker-led liquidation at unfavourable prices.
   

A margin call occurs when the equity in your trading account falls below the broker’s required maintenance margin. This means your collateral is no longer sufficient to support the borrowed funds used for trading.
If you do not restore the required margin, the broker may automatically close some or all of your positions to limit further losses.
Understanding margin trading, leverage, and the conditions that trigger margin calls is important before using borrowed funds for investing. Since leverage can amplify losses quickly, investors seeking steady long-term growth may find it safer and simpler to begin investing without leverage.