How to Calculate a Margin Call: Formula & Examples

A margin call represents a demand from a brokerage firm for an investor to deposit additional cash or securities into their margin account. Its primary purpose is to ensure the account maintains sufficient equity to cover potential losses on borrowed funds. Ignoring a margin call can lead to forced liquidation of securities, often at unfavorable prices.

Margin Account Fundamentals

A margin account allows investors to purchase securities by borrowing funds from their brokerage firm, using the purchased securities and other assets as collateral. The initial margin is the percentage of the purchase price an investor must pay with their own money. For instance, regulatory requirements for most equity securities set the initial margin at 50% of the purchase price. This means if an investor buys $10,000 worth of stock, they contribute $5,000, and the remaining $5,000 is borrowed from the broker.

Investors must also maintain a certain level of equity in their margin account, known as the maintenance margin. Individual brokerage firms often impose maintenance margin requirements, commonly ranging from 30% to 40%, depending on the securities and market volatility. The equity in a margin account is calculated as the current market value of the securities held minus the outstanding loan amount.

Identifying the Trigger Point

Investors can calculate the specific stock price at which their account’s equity will no longer meet the maintenance requirement. This price, known as the “trigger price,” helps investors understand the risk associated with their leveraged positions.

The formula to determine the trigger price for a long position is the loan amount divided by one minus the maintenance margin percentage. For example, if an investor purchases 200 shares of a stock at $100 per share, totaling $20,000, and uses an initial margin of 50%, they borrow $10,000. If the maintenance margin requirement is 30%, the trigger price is calculated as $10,000 (loan amount) divided by (1 – 0.30). This results in $10,000 divided by 0.70, which equals approximately $14,285.71 as the minimum account value. Dividing this value by the number of shares (200) yields a trigger price of $71.43 per share. This means if the stock price drops to $71.43, the account’s equity will fall to the maintenance margin threshold, resulting in a margin call.

Calculating the Margin Call Amount

Once a margin call is issued, the investor must determine the exact amount of additional funds or securities required. While the goal is to restore the account to compliance, some brokerage firms may require the equity to be brought back up to the initial margin requirement, which is a higher threshold.

To calculate the margin call amount, compare the current equity in the account with the required maintenance equity. For instance, if the market value of the securities in the account is $12,000, and the loan amount is $10,000, the current equity is $2,000. If the maintenance margin requirement is 30% of the market value, the required equity for a $12,000 position is $3,600 ($12,000 0.30). The difference, $3,600 minus $2,000, indicates a margin call of $1,600. This $1,600 is the cash amount needed to restore the account to the minimum maintenance level.

The margin call can also be calculated directly using the current market value, loan amount, and maintenance margin. The formula is: Margin Call Amount = (Current Market Value Maintenance Margin Percentage) – (Current Market Value – Loan Amount). Using the previous example, ($12,000 0.30) – ($12,000 – $10,000) = $3,600 – $2,000 = $1,600. Brokers have discretion in how they calculate the exact amount and the level to which the account must be restored. Investors should consult their brokerage agreement to understand specific policies regarding margin call calculations and requirements.

Responding to a Margin Call

Upon receiving a margin call, investors typically have a limited timeframe, usually a few business days, to address the deficiency. There are several ways to meet a margin call.

One method is to deposit additional cash directly into the margin account. Another option is to deposit fully paid, marginable securities from another account into the margin account. The value of securities needed to cover a cash margin call will be higher than the cash amount itself, as it is discounted by the maintenance requirement of the newly deposited securities. For example, to cover a $1,000 call with securities subject to a 30% maintenance requirement, approximately $1,428.57 worth of securities would be needed ($1,000 / (1 – 0.30)).

A third option is to sell some of the existing securities in the margin account. If the margin call is not met within the specified timeframe, the brokerage firm reserves the right to liquidate positions in the account to satisfy the requirement, often without prior notification to the investor. This forced liquidation can occur regardless of market conditions or the investor’s desired holding period, potentially leading to significant losses.