How markets work
Margin call
A demand from your broker to add cash or sell holdings, because your account equity has fallen too low.
How it works
When losses push the equity in a margin account below the maintenance requirement, the broker requires the shortfall to be made good, usually within a very short window.
If you do not act, the broker liquidates positions at its own discretion. It is not obliged to sell the holdings you would have chosen, or to wait for a better price.
Where it misleads people
Margin calls arrive after the market has already fallen, so they force selling at depressed prices and lock in the loss. This is the mechanism by which leverage converts a temporary decline into a permanent one.
Related terms
- MarginBorrowing from your broker to buy more than your cash allows, using your portfolio as collateral.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
- DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
- Short squeezeA sharp price rise caused by short sellers being forced to buy back at once.
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