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How do I Resolve a Margin Call?
Mary McMahon
Mary McMahon
To resolve a margin call, investors can close out a position, deposit securities or cash to meet the margin, or allow the broker to sell securities from the account. When investors open margin accounts, it is advisable to read the terms of the agreement with care so they will know what to expect when the broker issues a margin call. If investors do not respond to the request to address the margin requirement, the broker is allowed to sell securities from the investor's account without receiving explicit permission to do so.
In a margin account, investors borrow money from a brokerage to make investments. The law usually requires a minimum deposit in such accounts in the form of a percentage of the total loan. This can be provided in cash or securities. If the stocks an investor holds decline in value, the amount on deposit falls, and it is possible to fall below the margin requirement. The broker will issue a margin call to ask the investor to correct the issue.
Investors holding open positions can close them to resolve the margin call. This may involve buying or selling securities, depending on the position. The broker can execute these orders on request from the customer and will work on getting the best possible deal for them. If the investor was planning on closing the position anyway, this may be a sound solution to the problem.
Another option is to deposit more cash or securities. Investors should have funds available in other accounts and can rapidly transfer them to the broker to meet the margin requirement. The investor should alert the broker to expect an incoming transfer from another financial institution, so the broker knows not to sell securities to resolve the problem. If the broker does not receive the deposit or there is a problem, she will contact the investor.
The investor can also do nothing, forcing the broker to sell securities, or specifically tell the broker to sell some of the securities in the account. The broker will decide which securities to sell on the basis of current values and the need, unless the investor provides particular directions. Brokers want to protect the financial interests of their clients, and thus are unlikely to make poor sales decisions when selling securities to meet a margin call. If a client feels a broker has breached fiduciary duty with a sale, it can be grounds for a lawsuit.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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Discussion Comments
If you are new to trading, it is good to know about trading on margin, but I would give yourself some time before using it. It can be easy to get carried away with all the extra buying power, and if your positions do not go the way you want them to, you could be issued a margin call. If you don't have any extra cash to meet that call, you will have to sell something in your account.
I have done a lot of stock and options trading and they all carry a certain amount of risk - the same goes with trading on margin. You need to keep a close eye on your investments at all times, and not assume anything.
I have received a few margin calls over the years. I usually will sell something in my account to cover the call. I know that if you do not meet their deadline, and don't take any action, your broker will go ahead and sell securities for you. That is probably not the way you want to handle it. It would be best if you made the decision of what you want to sell in your account if you don't want to deposit more cash.
Before ever opening up a margin account I would recommend that you really understand a margin call definition. Even after that, I would use a virtual account before trading with real money on margin.
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