Log in or sign up to add this lesson to a Custom Course. Login or Sign up. He's excited about the idea of being able to borrow money to buy more shares of stock and take advantage of leverage to magnify his returns. Unfortunately, the market hasn't been doing too well lately, and last week Fred received a courtesy email from his broker that he should be prepared for the possibility of a margin call. Let's take a look at what exactly a margin call is and put Fred's mind at ease with a hypothetical example of what would happen if one occurs.
A margin account is different than a regular investment account because it allows the investor to borrow money to buy securities such as stocks and bonds. A broker won't allow an investor to borrow all the money needed to buy an investment though; Fred is expected to have his own money or equity in the account.
If Fred's equity as a percentage of the account drops below that amount, or a more restrictive limit set by the broker, the broker may issue a margin call.
The margin call requires Fred to make a deposit to bring the equity back above the threshold or else some of the securities in the account will be sold in order to meet the minimum equity level. An easy formula to determine the equity ratio is to subtract the amount borrowed from the current portfolio value, which gives us the equity, and divide that amount by the current portfolio value. Let's go back to Fred's portfolio. But what if Fred didn't put all his money in one stock? This gives him an equity ratio of Even though XYZ has taken a significant loss, since Fred's portfolio total is above the minimum he will not receive a margin call.
A margin call is when a broker requires an investor who trades in a margin account to contribute additional equity in order to maintain a minimum ratio. A margin account allows investors to borrow money from the broker to invest, but an investor must have a minimum amount of his own money or equity in the account in addition to the borrowed funds.
If the total portfolio equity ratio drops below this threshold, the broker will sell shares of portfolio investments until the ratio rises to an acceptable level. Investors can prevent this by sending additional money to the account in order to increase the equity ratio. To unlock this lesson you must be a Study. Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2, colleges and universities.
You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level. To learn more, visit our Earning Credit Page.
Not sure what college you want to attend yet? The videos on Study. Students in online learning conditions performed better than those receiving face-to-face instruction. Explore over 4, video courses. Find a degree that fits your goals. Add to Add to Add to. Want to watch this again later? About Create Edit Share. Custom Courses are courses that you create from Study. Use them just like other courses to track progress, access quizzes and exams, and share content.
Organize and share selected lessons with your class. Make planning easier by creating your own custom course. Add important lessons to your Custom Course, track your progress, and achieve your study goals faster.
Creating a Custom Course. Create a new course from any lesson page or your dashboard. Click "Add to" located below the video player and follow the prompts to name your course and save your lesson.
Click on the "Custom Courses" tab, then click "Create course". Next, go to any lesson page and begin adding lessons. Editing a Custom Course. Edit your Custom Course directly from your dashboard. Name your Custom Course and add an optional description or learning objective.
Create chapters to group lesson within your course. Remove and reorder chapters and lessons at any time. Sharing a Custom Course. Share your Custom Course or assign lessons and chapters. Share or assign lessons and chapters by clicking the "Teacher" tab on the lesson or chapter page you want to assign. Students' quiz scores and video views will be trackable in your "Teacher" tab.
A margin call can be an intimidating event for an investor. In this lesson we will look at what exactly a margin call is. Additionally, we will look go over the potential outcomes of the margin call.
Definition A margin account is different than a regular investment account because it allows the investor to borrow money to buy securities such as stocks and bonds.
Want to learn more? Select a subject to preview related courses: Lesson Summary A margin call is when a broker requires an investor who trades in a margin account to contribute additional equity in order to maintain a minimum ratio. Register for a free trial Are you a student or a teacher? I am a student I am a teacher. What is your educational goal? Unlock Your Education See for yourself why 30 million people use Study.
Become a Member Already a member? Earning College Credit Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2, colleges and universities. To learn more, visit our Earning Credit Page Transferring credit to the school of your choice Not sure what college you want to attend yet?
Browse Articles By Category Browse an area of study or degree level. You are viewing lesson Lesson 36 in chapter 3 of the course:. Raising Capital for Business: Business Math Business Practice and Study Guide Praxis Economics: Practice and Study Guide Communications Workplace Communications with Computers Business Browse by Lessons What is Punitive Justice?
Perceiving in Myers-Brigg Legalese: Help and Review Ethics in the Workplace: Help and Review Perception and Attribution: Latest Lessons Rudolf Virchow: Help and Review Comprehensive English: Create an account to start this course today. Like this lesson Share. Browse Browse by subject. Upgrade to Premium to enroll in Corporate Finance: Enrolling in a course lets you earn progress by passing quizzes and exams.
Take quizzes and exams. Earn certificates of completion. You will also be able to: Create a Study Trainer Create custom courses Get your questions answered. Upgrade to Premium to add all these features to your account! What best describes you? Choose one Teacher Parent Student Tutor.
What's your main goal? Choose a goal Study for class Earn transferable credit on Study. Improve my grades Other Choose a goal Supplementing my in-classroom material Professional development Prepare for a teacher certification exam Engaging my students Explaining difficult topics in the classroom Other Choose a goal Helping my child with a difficult subject Personal review to better assist my child Improving my child's grades My child is studying for a credit granting exam Just for fun Other Choose a goal Learn something new Keep my mind sharp Prepare to go back to school Get ahead at work Other.
Your goal is required. Email Email is required. Email is not a valid email. Email already in use. See all other plans. Unlimited access to all video lessons Lesson Transcripts Tech support. Everything in our Premium Edition plus… Earn college credit Take two exams per month Finish official exams remotely Learn more.More...