|
|
Margin Call -
"Honey, The Phone's For
You"
© Copyright
2009,
D. Alan Carter / All Rights
Reserved
This is one phone call you're going to wish
you didn't have to take. But take it you must.
It means you've lost money on one or more
stocks. So much money, that you've tripped the
"maintenance margin" percentage (the amount you
need to maintain in your margin account after a
stock purchase) and your broker is exercising
his contractual rights to
have you increase your equity in that
margin account in order to protect his (the
broker's) investment.
Translation: deposit more money into the
margin account, or sell enough stock to satisfy
the "call." And do it in x business days, or
the broker will sell the securities -
while reserving the right to do the latter at
any time, with or without notice to you.
And you thought telemarketing calls were
bad.
|
|
|
|
By D. Alan
Carter
If you've ever taken out a loan, you've
already received a glancing education in
trading on margin. Margin trading, in it's
simplest terms, is trading with borrowed
capital. The lender in this case is your
broker. You are, in effect, borrowing money
from your broker to buy stocks. As with any
cautious lender, there will be a demand
for...
 read
more...
|
By D. Alan
Carter
Trading on margin first requires
setting up a margin account with a
registered securities broker, or transitioning
an existing cash account into a margin
account. Before taking that step, you
should fully understand, and be comfortable
with, the inherent risks associated with a
margin account. Among them...
read
more...
|
 Margin Call - The Triggers
A margin call is typically triggered by drop in the share
price of a stock owned in your margin account. Let's go back to
our hypothetical example of SkyHigh Sausage, of which you
bought 500 shares at $10.00 per share, putting up half the
money yourself (all the money in your margin account and
borrowing the other half on margin. Your net
value is $2500 (value of shares - your loan, or $5000 - $2500 =
$2500). By law, the broker will have maintenance margin (the
amount you need to maintain after the trade) of at least 25% of
the market value of the securities in the account at the
time of purchase. That means the broker will need to see
your equity in the stock at no less than $1250 (25% of
$5000).
If the share price of SkyHigh Sausage drops 20% to $8, your
net value has shrunk to $1500 (value of shares - loan, or
$4000 - $2500 = $1500). You're still within the good graces of
the broker, at least with respect to maintenance margin.
But what if the share price drops another $1 to $7? Let's do
the math. Value of shares = $3500. Loan = $2500. Your net value
is now $1000, a bit below the $1250 (25% of $5000) required for
maintenance margin. You will be getting a margin call
from your broker for the difference ($250). You will be
expected to either wire those funds into your account, or sell
sufficient stock to alleviate the deficit.
Keep in mind that a broker may have higher maintenance
requirements than required by law, to which you will have to
oblige. This is called a "house requirement." In our example
above, if your broker had a house requirement of 40%, that
would translate into a minimum equity of $2000 on your part.
If SkyHigh Sausage dropped to $7, your margin call would
be for $1000.
Beyond a drop in the share price of the
equities you hold, a margin call can also be triggered
simply by a change in your broker's "house
requirement." Such a change can come with little or no
notice, precipitating a margin call, or "house call."
Margin Call - Courtesy Not
Required
Generally speaking, if your margin account falls
below your broker's maintenance requirement,
your broker will make a margin call to inform you that you
need to deposit more cash or securities into your account,
or dispose of sufficient securities to alleviate the
deficit. In such a case, you will likely be give a number
of days to meet the margin call (usually 3-5). If you are
unable to meet the margin call within the allowable time frame,
your broker will take it upon himself to sell your
securities to increase the equity in your account up to or
above the firm's maintenance requirement.
But remember - this is a courtesy. Your broker is
likely not required to make that margin
call, or otherwise tell you that your account has fallen below
the firm's maintenance requirement. Indeed, if you'll look over
the fine print of the margin agreement you signed, you'll find
that your broker may sell the securities in your
account at any time without consulting you first. In
fact, even if your broker offers you the time to get
your finances in order, he can still turn right around and sell
your securities - without waiting for you to meet the
margin call.
For additional information on margin calls and margin
trading:
U.S. Securities and Exchange Commission -
"Margin: Borrowing Money To Pay For Stocks"
Wikipedia - Margin Trading and Margin
Calls
|