Written byA margin call is a demand from a lender for extra cash or security when the value of the assets backing a loan falls too far.
Also known as: margin loan call, maintenance call
Key points
- Margin calls are most common on margin loans used to buy shares, where the shares themselves are the security.
- The lender sets a maximum loan to value ratio, and a call is triggered when falling values push the loan past it.
- You usually meet a call by paying down the loan, adding cash, or lodging more assets as security.
- If the call is not met in time, the lender can sell assets to bring the loan back within its limit.
- Calls arrive fastest in a falling market, which is why borrowers keep a buffer instead of borrowing to the limit.
How a margin call works
A margin loan lets you borrow against investments you already hold. The lender values that portfolio regularly, applies its own lending ratio to each holding, and compares the result with what you owe. While the loan sits under the limit, nothing happens.
When markets fall, the value of the security falls but the debt does not. Once the gap closes past a buffer the lender allows, it issues a margin call. The demand is for the amount needed to bring the loan back inside the limit, not for the whole balance.
Meeting a margin call
There are three usual ways to answer one. Deposit cash to reduce the balance, transfer in more approved securities to lift the value of what backs the loan, or sell part of the holding and use the proceeds to pay down the debt.
The window is short and is set out in the loan contract, sometimes as little as one business day. If nothing is done, the lender is entitled to sell holdings itself, at whatever the market pays that day, and you carry any shortfall that is left.
Managing the risk
Borrowing to invest magnifies both directions, so the same fall that would be uncomfortable in an unborrowed portfolio can force a sale at the worst possible moment. That is collateral risk in its clearest form: the security is the thing that lost value.
Common ways to reduce the pressure are borrowing well below the maximum, spreading holdings so one stock cannot drag the whole ratio down, keeping cash available, and knowing in advance which holdings would be sold. A margin call is not a default, but ignoring one can lead to one.
Example
An investor holds $200,000 of shares with a $100,000 margin loan against them. The lender allows borrowing up to 70% of the portfolio value, plus a small buffer. A sharp market fall drops the portfolio to $130,000, so the maximum loan is now around $91,000. The lender issues a margin call for the difference. The investor can deposit cash, add more shares as security, or sell part of the portfolio to bring the loan back within the limit.
Not to be confused with
- Collateral risk
- collateral risk is the chance security loses value, a margin call is what the lender does about it
- Default
- a margin call is a demand for more cover, default is failing to meet the terms of the loan
Frequently asked questions
How does a margin call work?
The lender revalues the assets securing your loan and compares them with the balance owing. If falling values push the loan above the agreed lending ratio, it demands enough cash or extra security to bring the loan back within the limit, usually within a very short window.
What happens if you cannot meet a margin call?
The lender can sell some or all of the assets securing the loan without needing your agreement, and applies the proceeds to the balance. Because that sale happens in a falling market, it often crystallises the loss. Any shortfall left over is still your debt.
How long do you have to meet a margin call?
The period is set out in your loan contract and is typically short, sometimes as little as one business day. Some lenders allow slightly longer, and some also apply an automatic sell down once the ratio passes a further trigger. Check the specific terms of your facility.
What triggers a margin call?
Most often a fall in the market value of the securities backing the loan. It can also be triggered when a lender reduces the lending ratio it applies to a particular holding, when a stock is removed from its approved list, or when you draw further on the loan.
Are margin calls only for share investors?
No. The same mechanism appears wherever a loan is measured against fluctuating security values, including some commercial property facilities and derivative positions. Share margin loans are simply the most familiar version for individual investors in Australia.
Related terms
Security (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionLoan-to-value ratio (LVR)
A loan-to-value ratio (LVR) is the amount you borrow as a percentage of the value of the security, usually property, and a key measure of lending risk.
Read definitionCollateral risk
Collateral risk is the chance that an asset pledged as security fails to cover the exposure because it falls in value, cannot be sold quickly or cannot be enforced.
Read definitionDefault
A default is a borrower's failure to meet the terms of a credit contract, usually by missing repayments, which lets the lender demand the balance and enforce its security.
Read definitionPortfolio
A portfolio is a grouped set of loans, leases and the assets behind them, held by one lender or lessor and managed together for reporting, risk and performance.
Read definitionInterest rate risk
Interest rate risk is the exposure a financial asset, liability or portfolio has to changes in market interest rates, which alter the present value of its future cash flows.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.