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Margin Calls

Sigma Investment Counselors

July 10, 2020

According to Investopedia, a margin call arises when an investor borrows money from a broker to make investments.  When an investor uses margin to buy or sell securities, he pays for them using a combination of his own funds and borrowed money from a broker.  A margin call is triggered when the investor’s equity, as a percentage of the total market value of securities, falls below a certain percentage requirement, which is called maintenance margin.  When an investor’s account falls below the broker’s required margin, a margin call is the broker’s demand that the investor deposit additional money or securities.  If the investor fails to meet a margin call, the broker will sell enough stock to bring the account back into compliance.

Margin calls can exacerbate market weakness by triggering the forced sales of securities.  A similar effect, but on the upside, is a short squeeze which occurs when an investor fails to meet a call for additional cash or collateral when a short position moves against the short seller.

Investors should seek to differentiate between investment changes based on fundamentals rather than trading considerations.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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