Buying stocks on margin means that you have borrowed money from the brokerage to purchase stocks.
If the value of the stocks decreases, the brokerage will ask you to deposit additional cash into your account to meet a percentage of equity outlined in your margin agreement. The stocks have to be worth a certain % of the amount you borrowed. 25% is minimum but many brokerage have a higher requirement.
A margin call is a demand from a brokerage firm to an investor to deposit additional funds or securities into their margin account to meet margin requirements. This happens when the value of the assets in the margin account falls below a certain level, known as the maintenance margin. The margin call is essentially a notice that the investor’s account is at risk of not being able to cover potential losses on borrowed money
When somebody buys stocks or other investments on margin, it’s buying with a loan. If the investments move in such a way that the lender is concerned about getting their money back, they may call in the loan immediately. This is a margin call.
Say you borrow $100k to buy 1000 shares of XYZ Co. But instead of going up, the stock has fallen from $100 to $80. The shares you bought on margin are now worth $20k less than the amount you borrowed. The bank may ask for their $100k loan be paid back, or ask for additional collateral from you to insure that they don’t lose money because of your poor investment.
If you borrow money (on margin) to invest, and your investments start losing value, the bank or broker will ask you to quickly add more money or sell some investments to reduce risk.
You borrowed money from your bookie (broker) to place bet on a horse (buy a stock) you couldn’t afford but were sure would beat the odds and win big-time. Bookie gets an agreed upon cut (broker gets interest) and you pocket the rest.
Surprise! Your horse lost. Your bookie wants his money back. You either give him the money, or start pawning valuables to avoid broken kneecaps. Except brokers will likely not resort to violence and simply sell your holdings to get their money back.
A margin account is an account full of stock that is used to take out a loan. It’s basically collateral. A margin call is when the lender says the margin account is undervalued and the borrower needs to add money to it.
So say a big time CEO owns a lot of stock in their car company and decides to buy a social media company. He puts a bunch of stock in a margin account and uses it to get a loan. This means he doesn’t have to pay capital gains taxes, yay capitalism! But then he starts throwing Nazi salutes or something crazy like directly getting involved in politics to defund his government opponents and give himself lucrative contracts. I’m just making something crazy up that would never actually happen. So now investors drop the stock and its value plummets. The lender sees the margin account dropping and they want more stock in their car company margin account so they have enough collateral if they need to call in the debt. That would be a margin call.
If you have a margin account, it lets you purchase up to 50% of the stock with the brokerage’s money while you pay them interest. The stock purchased acts as collateral.
If the equity left in the account ever drops below 25% of the stock value, the brokerage will do a margin call. Which means you either need to add to the account (either cash or sometimes more stock to use as collateral) quickly or they’ll start to sell off the stock in the account to get you back up to 25% equity.
This can be VERY bad, because if the stock has dropped enough to need a margin call, it’s being sold at a massive loss.
If there are enough margin calls it can crash a stock itself further since a bunch of investors are being forced to sell at the current crashed price – crashing the price more.
In its broadest meaning a Margin Call means a lender of money is asking for additional collateral to back a loan they have made because the original collateral has lost value. Imagine you borrowed $100 from someone and gave them a bushel of corn worth $50 to hold onto as collateral. The lender is risking a loss of $50 as if you can’t pay they can always sell the corn for $50. Go forward a week and the corn harvest has come in and there is a lot of corn around so people are only willing to pay $25 a bushel. Now the lender is risking a loss of $75 so he asks you for another bushel of corn or to pay back $25.
Imagine you took out a $250k mortgage on your house that’s worth $300k. Then the market crashes and your home is now worth $100k, but you still owe the bank $250k. If you default and the bank repossesses the house, they don’t get all their money back. This situation is sometimes called being “underwater”.
A margin call is a solution to this problem of being underwater, where the lender simply says “deposit another $150k of collateral to make up the difference”. What happens if you don’t will be specified in the contract.
I own stocks. Those stocks are in the possession of an outfit called a brokerage. They will loan me money in exchange for an agreement that if I don’t pay back the loan, they can sell some or all of my stocks in order to get their money. This loan is called a margin loan.
Typically, a brokerage will extend credit up to a particular percentage of the value of the assets, that is, the stocks, that they are holding on to. If the value of the stocks goes down, the dollar amount of credit that the brokerage is willing to extend will decrease.
For example, let’s say I had $2 million of stock and my brokerage gave me a 40% margin loan. Let’s say that I took all $800,000 to buy real estate or stocks or a private villa in the Dominican Republic. Or whatever. The day that the stock market plunged so that I only had 1.75 million, my brokerage would contact me and tell me that I could either give them back some of the money so that I was still at only 40% of the value of my stocks, or else they would sell my stocks at the lower price.
That call, in which the brokerage threatens to sell stock at the diminished price. I don’t pay them back, can cause me to sell a bunch of stuff, be it my Villa in the Dominican Republic, real estate, other stock, whatever in order to satisfy the brokerage’s demand. Cuz you never want to sell on a bad day, and a margin call is always going to happen, by definition, on a bad day.
Let’s say you loan Bobby $5 to buy a candy bar. As soon as you see that Bobby has hookers and blow instead of candy and you feel that Bobby is wasting your money, you demand your $5 to be paid back immediately.
Comments
I think some context to the question is needed as it can have different meanings.
Buying stocks on margin means that you have borrowed money from the brokerage to purchase stocks.
If the value of the stocks decreases, the brokerage will ask you to deposit additional cash into your account to meet a percentage of equity outlined in your margin agreement. The stocks have to be worth a certain % of the amount you borrowed. 25% is minimum but many brokerage have a higher requirement.
The request is called a margin call.
https://www.reddit.com/r/explainlikeimfive/s/U1VlThWVU0
This pretty much explains it
or this
A margin call is a demand from a brokerage firm to an investor to deposit additional funds or securities into their margin account to meet margin requirements. This happens when the value of the assets in the margin account falls below a certain level, known as the maintenance margin. The margin call is essentially a notice that the investor’s account is at risk of not being able to cover potential losses on borrowed money
When somebody buys stocks or other investments on margin, it’s buying with a loan. If the investments move in such a way that the lender is concerned about getting their money back, they may call in the loan immediately. This is a margin call.
Say you borrow $100k to buy 1000 shares of XYZ Co. But instead of going up, the stock has fallen from $100 to $80. The shares you bought on margin are now worth $20k less than the amount you borrowed. The bank may ask for their $100k loan be paid back, or ask for additional collateral from you to insure that they don’t lose money because of your poor investment.
If you borrow money (on margin) to invest, and your investments start losing value, the bank or broker will ask you to quickly add more money or sell some investments to reduce risk.
Think of it like going to a bookie
You borrowed money from your bookie (broker) to place bet on a horse (buy a stock) you couldn’t afford but were sure would beat the odds and win big-time. Bookie gets an agreed upon cut (broker gets interest) and you pocket the rest.
Surprise! Your horse lost. Your bookie wants his money back. You either give him the money, or start pawning valuables to avoid broken kneecaps. Except brokers will likely not resort to violence and simply sell your holdings to get their money back.
A margin account is an account full of stock that is used to take out a loan. It’s basically collateral. A margin call is when the lender says the margin account is undervalued and the borrower needs to add money to it.
So say a big time CEO owns a lot of stock in their car company and decides to buy a social media company. He puts a bunch of stock in a margin account and uses it to get a loan. This means he doesn’t have to pay capital gains taxes, yay capitalism! But then he starts throwing Nazi salutes or something crazy like directly getting involved in politics to defund his government opponents and give himself lucrative contracts. I’m just making something crazy up that would never actually happen. So now investors drop the stock and its value plummets. The lender sees the margin account dropping and they want more stock in their car company margin account so they have enough collateral if they need to call in the debt. That would be a margin call.
If you have a margin account, it lets you purchase up to 50% of the stock with the brokerage’s money while you pay them interest. The stock purchased acts as collateral.
If the equity left in the account ever drops below 25% of the stock value, the brokerage will do a margin call. Which means you either need to add to the account (either cash or sometimes more stock to use as collateral) quickly or they’ll start to sell off the stock in the account to get you back up to 25% equity.
This can be VERY bad, because if the stock has dropped enough to need a margin call, it’s being sold at a massive loss.
If there are enough margin calls it can crash a stock itself further since a bunch of investors are being forced to sell at the current crashed price – crashing the price more.
In its broadest meaning a Margin Call means a lender of money is asking for additional collateral to back a loan they have made because the original collateral has lost value. Imagine you borrowed $100 from someone and gave them a bushel of corn worth $50 to hold onto as collateral. The lender is risking a loss of $50 as if you can’t pay they can always sell the corn for $50. Go forward a week and the corn harvest has come in and there is a lot of corn around so people are only willing to pay $25 a bushel. Now the lender is risking a loss of $75 so he asks you for another bushel of corn or to pay back $25.
Hey buddy, you got that money I loaned you to gamble with?
That phone call is the margin call.
Imagine you took out a $250k mortgage on your house that’s worth $300k. Then the market crashes and your home is now worth $100k, but you still owe the bank $250k. If you default and the bank repossesses the house, they don’t get all their money back. This situation is sometimes called being “underwater”.
A margin call is a solution to this problem of being underwater, where the lender simply says “deposit another $150k of collateral to make up the difference”. What happens if you don’t will be specified in the contract.
I own stocks. Those stocks are in the possession of an outfit called a brokerage. They will loan me money in exchange for an agreement that if I don’t pay back the loan, they can sell some or all of my stocks in order to get their money. This loan is called a margin loan.
Typically, a brokerage will extend credit up to a particular percentage of the value of the assets, that is, the stocks, that they are holding on to. If the value of the stocks goes down, the dollar amount of credit that the brokerage is willing to extend will decrease.
For example, let’s say I had $2 million of stock and my brokerage gave me a 40% margin loan. Let’s say that I took all $800,000 to buy real estate or stocks or a private villa in the Dominican Republic. Or whatever. The day that the stock market plunged so that I only had 1.75 million, my brokerage would contact me and tell me that I could either give them back some of the money so that I was still at only 40% of the value of my stocks, or else they would sell my stocks at the lower price.
That call, in which the brokerage threatens to sell stock at the diminished price. I don’t pay them back, can cause me to sell a bunch of stuff, be it my Villa in the Dominican Republic, real estate, other stock, whatever in order to satisfy the brokerage’s demand. Cuz you never want to sell on a bad day, and a margin call is always going to happen, by definition, on a bad day.
Let’s say you loan Bobby $5 to buy a candy bar. As soon as you see that Bobby has hookers and blow instead of candy and you feel that Bobby is wasting your money, you demand your $5 to be paid back immediately.
Very simple, margin is buying stocks on credit, margin call means the entity loaning the money wants it paid back.