What Are Margin Calls? How to Avoid Account Liquidation

Trading on margin (using borrowed capital) can increase your buying power. However, it is very risky. If your investments fall in value, your margin account equity may drop below a required minimum. When this happens, your broker will issue margin calls. This is a serious demand to deposit more funds or sell assets to cover your potential losses.

This guide explains the definition, how does margin call work, and the steps you can take to avoid one.

1. What Are Margin Calls In Stocks?

A margin call is a demand from your broker to add more money or securities to your account when the value of your investments falls too low.

Specifically, what is a margin call in stocks? It occurs when your account equity (the value of your stocks minus the loan amount) drops below the maintenance margin requirement set by your broker.

According to the Financial Industry Regulatory Authority (FINRA), firms typically require investors to maintain an equity level of at least 25% of the total market value of the securities in the account (FINRA, n.d.). 

If your equity drops below this level, the broker “calls” you. They demand that you either deposit more cash or sell assets to bring your equity back up to the required maintenance level. A margin call is a serious warning sign that your leverage risk is too high.

2. What Triggers a Margin Call?

A margin call is triggered when your margin account equity falls below a safe level. This can happen for several reasons, usually related to the value of your investments or changes in broker policy.

2.1. Market Volatility

The most common trigger is market volatility. If the securities you bought on margin fall in price, the total value of your account decreases. A sharp drop in price due to high volatility can quickly reduce your equity and trigger a margin call.

2.2. Excessive Leverage

Using excessive leverage makes your account very sensitive to small price changes. If you borrow the maximum amount possible, you have a very small equity buffer. Even a minor dip in stock prices can wipe out this buffer and trigger a call.

2.3. Falling Equity Value

The technical trigger is when your equity value falls below the “maintenance margin” requirement. This is the minimum equity (as a percentage of the total investment) that your broker requires an investor to keep in the account. For stocks, this is often 25% of the total value.

2.4. Broker Margin Policy Changes

Sometimes, the broker itself can trigger a call. During periods of high market risk, a broker may change its margin policy. They might increase the maintenance margin requirement (e.g., from 25% to 40%) for specific securities. This change can immediately put your account into a margin call, even if your stock prices haven’t moved.

3. Margin Call Scenario

Understanding what it means to get margin called is easiest with a clear example. Let’s look at a common scenario for an investor.

The Trade:

• You buy $10,000 worth of stock or other securities.
• You pay $5,000 (your equity).
• You borrow $5,000 (your margin loan).

The Rule:

• Your broker’s maintenance margin requirement is 25%.
• This means your equity must always be at least 25% of the total stock value.

The Market Drop:

• Your stocks fall, and the total value of your position is now only $6,000.

The Call:

• Your equity is now: $6,000 (Value) – $5,000 (Loan) = $1,000.
• Your required equity is: 25% of $6,000 = $1,500.
• Because your $1,000 in equity is below the $1,500 requirement, you get a margin call.

You must deposit $500 in cash or sell assets. If you do nothing, your broker has the right to sell your securities immediately to cover the loan, often without asking you first.

4. Margin Call Example: How to Calculate

Here is a simple breakdown of how to calculate margin calls using the numbers from the previous scenario.

A broker will calculate your “Margin Level” (your equity as a percentage of the total market value) and compare it to their “Maintenance Margin” requirement (often 25% for stocks), which every investor must track.

Item	Value
Initial Investment	$10,000
Loan (Margin Debt)	$5,000
Current Value After Drop	$6,000
Equity = $6,000 – $5,000	$1,000
Margin Level = $1,000 / $6,000 = 16.7%	Below 25% (Margin Call Triggered)

Brokers use this formula to find your current margin level:

Using the numbers above:

• Your Calculation: $1,000 (Equity) / $6,000 (Total Value) = 16.7%
• Broker’s Rule: The Maintenance Margin required is 25%.

Because your 16.7% Margin Level is below the 25% requirement, a margin call is triggered.

5. Strategies to Respond to a Margin Call

Receiving a margin call requires immediate action from the investor. Ignoring it is not an option, as it can lead to forced losses. A trader typically has several options to bring the account back into compliance.

• Deposit funds: The most direct solution is to deposit additional cash or marginable securities into the account. This action increases the account’s total equity, raising the margin level back above the maintenance requirement.
• Sell some assets (Liquidate): A trader can choose to sell some of the assets in their account. The proceeds from the sale are used to pay down the margin loan (debt), which in turn increases the equity percentage.
• Close part of your position: Similar to selling assets, a trader can close a portion of their losing position(s). This reduces the total size of the margin loan and cuts the overall risk exposure.
• Negotiate with your broker (Limited Option): In some rare cases, if the call is very small or clearly due to a temporary flash crash, a trader might be able to negotiate with their broker for a short extension. However, this is never guaranteed.
• Avoid delay (The Consequence): A trader must avoid delay and respond promptly. Brokers are not required to give you extra time. They have the legal right to liquidate your positions immediately without further warning to protect themselves from losses.

6. How to Prevent Margin Calls

Getting a margin call is a stressful experience that can force an investor to sell investments at a loss. The best strategy is to manage your risk proactively to prevent one from ever happening.

Here are five effective ways to avoid margin calls.

6.1. Use Conservative Leverage

The easiest way to avoid a margin call is to not use too much leverage. While many brokers offer high borrowing limits, it is safer to be conservative. Many experts suggest never borrowing more than 30% to 40% of your total portfolio value.

6.2. Maintain a Safety Buffer

Do not let your account equity drop close to the maintenance margin requirement (e.g., 25%). It is smart to maintain a “safety buffer” of your own, by holding extra cash or equity. For example, make it your personal rule to always keep your margin ratio at least 10% to 20% higher than the broker’s minimum.

6.3. Monitor Your Portfolio

When you trade on margin, you must be an active investor. Monitor your portfolio daily to know exactly where your equity level stands. This is especially important during volatile markets, when prices can fall very quickly.

6.4. Diversify Investments

Avoid concentrating all your margin funds into one or two high-risk stocks or securities. By diversifying your investments across different, non-correlated assets in a diversified portfolio, you reduce the risk that a large drop in a single stock will wipe out your equity and trigger a margin call.

6.5. Set Stop-Loss Orders

A stop-loss order is a tool that tells your broker to automatically sell one of your securities if it falls to a specific price. Using stop-loss orders is a key risk management tactic. It helps you automatically limit your losses before they become large enough to trigger a margin call.

7. Advantages and Risks of Margin Trading

Using margin (leverage) is a high-risk strategy. It is essential for an investor to understand both the potential benefits and the significant dangers before you begin.

7.1. Advantages

Margin trading is popular because it offers several key benefits:

• Increased buying power: Margin allows you to increase your buying power (leverage) to control a larger position than your cash balance alone would allow.
• Amplified profits: If the market moves in your favor, margin amplifies your profits. A 5% gain on a leveraged position in securities can result in much larger percentage returns on your actual equity.
• Flexibility: Margin accounts are often required for certain strategies, such as short selling (betting that a stock’s price will fall) or hedging other positions in your portfolio.

7.2. Risks

The risks of margin trading are high and can lead to rapid losses.

• Amplified losses: Just as profits are magnified, losses are also magnified. A small price move against you can result in a very large loss to your equity.
• Sudden margin calls: A margin call can happen very quickly, especially in a volatile market downturn. You may not have much time to react.
• Forced liquidation: The most significant risk is that your broker has the legal right to sell your securities (liquidate your positions) without your permission or notification to meet a margin call.
• Interest costs: A margin loan is not free. You must pay interest on the money you borrow. This interest cost (margin interest) reduces your profits and adds to your losses over time.

8. Margin Call vs. Maintenance Margin

It is easy to confuse “Margin Call” and “Maintenance Margin,” but they are not the same. One is the minimum level you must keep, and the other is the demand for money when you fall below that level.

Here is a simple comparison:

Feature	Maintenance Margin	Margin Call
Definition	The minimum equity level (e.g., 25% of the total security value) you must always maintain in your margin account.	The action or warning from your broker demanding you deposit funds because your equity is too low.
Triggered When	This rule is always active. It is the threshold your account equity must stay above.	Triggered when your account equity falls below the Maintenance Margin level.
Action Required	Monitor this level regularly to avoid a potential margin call.	Deposit cash or sell assets immediately to bring equity back above the maintenance margin.
Authority	A rule set by regulators (like FINRA/SEC) and implemented by your broker.	A demand sent by your broker to your margin account.

9. Frequently asked questions about Margin Calls

10. The Bottom Line

Margin calls are a critical warning sign that a leveraged margin account is dangerously out of balance. While margin trading can amplify profits and potential returns, it also dramatically amplifies the risk of loss.

The core protection strategies are simple: proactive money management, always using stop-loss orders, and maintaining a healthy “margin buffer” far above the minimum requirement. Understanding your account’s limits and monitoring your securities portfolio regularly is the best way for an investor to avoid a surprise liquidation.

To continue building your financial knowledge, an investor can follow PipRider for more essential trading insights and updates.