How to Handle Margin Calls

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Narrator: A margin call is a notification from your broker informing you that your account equity doesn't meet the necessary requirements while trading with borrowed funds. There are various types of margin calls depending on what product you're trading, the type of account you're trading in, and the margin you're using.

However, regardless of the type, if you're issued a margin call, you have to bring your account back up to the required minimum value. You can often do this by depositing cash or marginable securities or by closing other positions. If you don't meet the requirement promptly, your broker may have to close your positions to cover the margin call.

Here's a simplified example of how one type of margin call, a maintenance call, could happen. Suppose you have $5,000 in cash in a margin account. You borrow an additional $5,000 to purchase $10,000 worth of stock.

When trading on margin, you have to maintain a certain percentage of the account's value. This is called maintenance margin. In this example, let's assume the maintenance margin is $7,000. Suppose the stock price falls and drags the value of the account from $10,000 to $6,800, which is below the maintenance margin. Your broker would then issue a margin call and notify you immediately. This means you'd need to increase the account value by at least $200.

Margin calls need to be addressed promptly. There are number of ways to do this, but keep in mind that depending on the severity of the margin call, your broker may forcibly liquidate all or part of your account without prior notice in order to protect your interests or theirs.

Once you've been issued a margin call, there are a few ways to resolve it.

Depositing cash is often the easiest. If you've already connected your bank and brokerage account, you can easily complete an ACH transfer into your brokerage account to meet the requirement.

If you haven't already connected your account for ACH transfers, then you can use a wire transfer. The wire transfer is usually quick but requires contacting your bank, which may involve wait times and fees.

On-screen text: Not all securities are marginable. You can only transfer marginable securities if you're transferring securities into the account to meet a margin call.

Narrator: An alternative to depositing cash is transferring cash or securities from one account with the same broker.

The value of the securities you need to transfer may vary depending on the type of margin call and the securities being transferred.

Another way to meet some types of margin calls is to close positions in your account to raise the cash needed.

Once again, the value of the positions you need to close may vary depending on the type of margin call and the positions.

If you don't meet your margin call, the broker reserves the right to close positions in your account without regard for profit or loss, and this may result in a taxable event. Therefore, it's best to meet the margin call yourself.

There are a couple things you can do to potentially avoid margin calls. Define your exit signals when entering a trade so you know when to get out if things go wrong. You can also consolidate accounts to more easily manage all your investments and increase your margin levels. Remember to use margin judiciously. Don't overleverage your account by using all your available margin at once.

Sometimes margin calls are unavoidable, but knowing how to resolve one can help you prepare.

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