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DECEMBER 10, 2020

What is a margin call and how do I avoid one?

Answered by
Jessica Inskip
Vice President , Consumer Investments Advanced Product Experiences at Bank of America
Margin is an extension of credit using eligible securities as collateral. You can use your margin loan to buy securities or withdraw funds for other purposes. Once an account is approved for margin, it is subject to requirements at the security, brokerage and industry level.
For instance, margin accounts typically have a minimum equity requirement of $2,000. Equity is the value of your assets minus any loan amount, and can also be thought of as what's leftover if you fully liquidated all positions. On the security level, finance industry regulations commonly referred to as Reg T, short for Regulation T, generally require 50% equity for new trades on margin. So if you want to buy $10,000 worth of ABC stock on margin, you will need to have in excess of $5,000 in your account to execute the trade. The brokerage firm you work with will also mandate a certain level of ownership. At Merrill this is 30% for fully marginable securities (those trading over $10.00 a share or listed on a major exchange or subsidiary).
In fact, each product class and security has it's own margin requirement, and additional margin requirements will be applied to concentrated positions. See the Margin Handbook for more details.
What is a margin call? A margin call is a demand from your brokerage firm to increase the equity in your account to bring it into compliance with margin requirements. If your account has breached either the minimum equity, firm ownership or Reg T requirement, your brokerage will issue a margin call, effectively suspending or inhibiting trading activity in your account until it is fully funded.
How long do I have to satisfy a margin call? Margin calls must be settled immediately, but no later than the displayed due date, which is normally two business days. If steps aren't taken to satisfy the margin call, your broker will sell enough of your securities to bring your account back into compliance. This can also occur at any time prior to the due date and without notice. The firm can also select any security to sell without regard to if it was what created the call in the first place. Getting in contact and working with your brokerage firm is a good step to understanding the length of time you have and your options.

What are my options to satisfy a margin call?

  • Deposit more cash: You can transfer more cash into your margin account. The cash that needs to be transferred to satisfy the call must be the exact amount of the call. For example, if your margin call is $1,000.00 you will need to deposit the full amount to satisfy the call.
  • Deposit securities: You can transfer securities held in other accounts into your margin account. Any excess of the security you are transferring will be credited towards the call. For example, if your margin call is $1,000.00 and you intend to deposit a fully marginable security with a 30% requirement, like Merrill's, you will need to deposit at least $1,428.57 worth ($1000/.70) to return to compliance as only 70% of the security's value will go towards the call.
  • Sell securities: You can sell positions held in your margin account to reduce the amount that you're borrowing. Upon liquidation, the requirement of the security is credited towards the call. For example, your margin call is $1,000 and you intend to sell a fully marginable security with a 30% requirement, you will need to sell $3,333.33 ($1,000/.30) to satisfy the call.
Your holdings could also suddenly leap in value and subsequently reduce or eliminate your margin call. But this is highly unlikely given the timeframe and you should not rely on market appreciation to satisfy margin calls. And, it is not even an option to satisfy Reg T calls.
How can I avoid a margin call? Investment losses can rapidly mount in a leveraged account, especially during volatile markets, making you susceptible to a margin call. You can protect against this possibility as long as you prepare for it. Here are a few tactics to consider.
  • Check you accounts daily: If you're trading on credit, it's important to frequently monitor your positions and portfolio so you can act accordingly to stay in compliance.
  • Manage your risk: Don't concentrate your account in one security, position or a single sector, where a drop in just one of them could put you at risk of a margin call.
  • Have a cash cushion: Keep excess equity in your margin account to protect against a sudden drop in its value. This is also achieved by not utilizing your full margin buying power.
  • Have a liquidity plan: Know what accounts you will tap for cash or which positions or securities you would liquidate in the event you receive a margin call.
Ready to get started?
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Margin risk disclosure
When you purchase securities, you may pay for the securities in full, or if your account has been established as a margin account with the margin lending program, you may borrow part of the purchase price from Merrill. If you choose to borrow funds for your purchase, Merrill's collateral for the loan will be the securities purchased, other assets in your margin account, and your assets in any other accounts at Merrill. If the securities in your margin account decline in value, so does the value of the collateral supporting your loan, and, as a result, we can take action, such as to issue a margin call and/or sell securities in any of your accounts held with us, in order to maintain the required equity in your account. If your account has a Visa® card and/or checks, you may also create a margin debit if your withdrawals (by Visa card, checks, preauthorized debits, FTS or other transfers) exceed the sum of any available free credit balances plus available money account balances (such as bank deposit balances or money market funds). Please refer to your account documents for more information.
Before opening a margin account, you should carefully review the terms governing margin loans. For Individual Investor Accounts, these terms are contained in the Margin Lending Program Client Agreement. For all other accounts, the terms are in your account agreement and disclosures. It is important that you fully understand the risks involved in using margin. These risks include the following:
  • You can lose more funds than you deposit in the margin account. A decline in the value of securities that are bought on margin may require you to provide additional funds to us to avoid the forced sale of those securities or other securities in your account(s).
  • We can force the sale of securities in your account(s). If the equity in your account falls below the maintenance margin requirements or Merrill Lynch's higher "house" requirements, we can sell the securities in any of your accounts held by us to cover the margin deficiency. You also will be responsible for any shortfall in the account after such as sale.
  • We can sell your securities without contacting you. Some investors mistakenly believe that they must be contacted for a margin call to be valid, and that securities in their accounts cannot be liquidated to meet the call unless they are contacted first. This is not the case. We will attempt to notify you of margin calls, but we are not required to do so. Even if we have contacted you and provided a specific date by which you can meet a margin call, we can still take necessary steps to protect our financial interests, including immediately selling the securities without notice to you.
  • You are not entitled to choose which securities in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, we have the right to decide which security to sell in order to protect our interests.
  • We can increase our "house" maintenance margin requirements at any time and are not required to provide you advance written notice. These changes in our policy may take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause us to liquidate or sell securities in your account(s).
  • You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to you under certain conditions, you don't have a right to the extension.
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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

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Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF).

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