Review the margin call examples below to learn more about how they occur, how much they are, and how to cover them.
Margin Call Scenarios:
Scenario 1 : How does a Margin Call occur?
You have $20,000 worth of securities bought using $10,000 on margin and $10,000 in cash. When the margin requirement is 30% and the value of the securities drops by 30% to $14,000, since the amount you borrowed from your broker stays at $10,000, your own equity becomes $4,000 which is lower than the 30% minimum margin requirement.
$4,000/$14,000 = 28.6% < 30%
A margin call occurs when the percentage of the equity in the account drops below the maintenance margin requirement.
Scenario 2 : How much is a Margin Call?
Following the scenario above:
$14,000*30% = $4200 → amount of equity you were required to maintain.
$4200 - $4000 = $200 → You have a $200 margin call.
Scenario 3 : How do I cover a Margin Call?
If you would like to deposit funds, the amount has to be equal to or more than the margin call amount.
If you choose to liquidate your stocks to cover the call, the amount you have to sell is equal to the margin call amount divided by the minimum maintenance requirement.
Following scenario 1 & 2:
$200/30% = $666.7
→ To maintain the 30% minimum margin requirement, you will need to either sell $666.7 worth of securities or deposit $200 worth of cash within 5 trading days, or Firstrade must liquidate your positions.