Margin call

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Justin Manger

A stock broker's demand on a margin-indebted investor, made if the investor's debt in the investment increases above the maximum allowable, to increase the amount of cash or other collateral in the equity to bring the investor's margin debt back down to the maximum allowable level (or preferably for the broker, lower).

Example

A man purchased 100 shares of a $100 stock on a 50% margin two months ago (meaning he paid $5000 initially, and owes another $5000 to his broker). Since then the stock's value has decreased to $90 a share. Since a 50% margin is the maximum allowable by most brokerages, the man receives a margin call from his broker. The broker tells the investor he needs to put another $1000 into the equity to bring it back up to its minimum maintenance margin of 50%. If the investor are unable to do this in a timely manner, the broker will have the right to sell whatever stocks/equity assets of the investor's his brokerage controls to bring the investor's account up to its minimum required margin (and in most cases without needing to consult the investor himself).

Historical Significance

Black Thursday, Monday and Tuesday, the single-day stock market drops occurring on October 24, 28 and 29, 1929 respectively, were all the result of a market-unbearable number of concurrent margin calls made during a severe fall in land prices. Since the maximum allowable margin debt back then was 90% (meaning only a 10% equity investment was required up-front, while 90% of the asset's initially-purchased value could be paid back in the future) and most investment speculation at the time was on land, a vast majority of those who received margin calls were far too cash-poor to bring their investments back to their minimum required margins. This resulted in a historically unprecedented sell-off which ultimately crippled the U.S. Economy for close to a decade (commonly referred to as "The Great Depression").