Marginal Call - What is Marginal Call?

Investors who buy stocks but lack sufficient funds often use margin trading. By opening a margin trading facility (MTF) with a broker, you can borrow additional funds to purchase stocks, with interest charged on the borrowed amount. Margin accounts have specific requirements, including maintaining a minimum balance. If your balance falls below this minimum, a margin call is triggered. Continue reading to understand a margin call and how to avoid it.

A broker issues a margin call when the value of securities in your margin trading facility (MTF) account drops below the maintenance margin. This account holds stocks purchased with both borrowed funds and your initial deposit. A margin call suggests that the value of some securities has decreased, often because of market conditions. To address a margin call, you must either deposit additional funds or sell some securities to restore the required balance.

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Before you begin margin trading, you must open a Margin Trading Facility account with your broker, separate from a Demat Account. By opening an MTF account, you agree to the broker's specific margin requirements.

Key terms to understand include:

• Initial Margin: This is the amount you must deposit into the MTF account before buying stocks, representing a percentage of the total purchase value.
  
• Maintenance Margin: This is the minimum equity level you must maintain in your account. Equity is calculated as the portfolio's value minus the margin debt. You will receive a margin call if your equity falls below this percentage.

Understanding margin calls becomes clearer once you grasp the margin requirements. Here is an example to illustrate the margin call process:

Suppose the broker sets the initial margin at 50% and the maintenance margin at 25%. You purchase securities worth ₹10,000, with an initial margin of ₹5,000 and a broker-lent amount of ₹5,000. The maintenance margin is ₹2,500.

If the stock price drops by 40%, reducing your portfolio value to ₹6,000, the maintenance margin now becomes ₹1,500 (25% of ₹6,000). With your equity at ₹1,000 (₹6,000 - ₹5,000), you need to add ₹500 to meet the maintenance margin.

A margin call occurs when your equity falls below the maintenance margin. If your equity drops to zero, the broker will sell your securities to recover the debt.

When you receive a margin call, you need to increase the equity in your MTF account quickly. Brokers typically notify you of a margin call via text or email. As specified by your broker, you will have a set number of days to address the issue by depositing additional funds or selling some securities. If you fail to comply within the given timeframe, the broker may liquidate your holdings to recover the loan. Delaying could lead to further losses, making covering the debt with your remaining assets even harder.

Now you may ask, ‘Is margin call dangerous?’. If you haven’t taken the time to do proper research, then a margin call can be risky as it places a huge burden on your finances. Let us look at ways how you can avoid it.

Regularly monitor your MTF account and strategically plan your investments to avoid margin calls. If you’re new to trading, avoiding aggressive margin trading is wise. Seasoned traders often preempt margin calls by liquidating assets before their accounts are at risk. To protect yourself, consider keeping a cash reserve for market downturns.

High-value transactions in margin trading are common, and accessing substantial funds can be challenging. Poor market conditions can significantly impact margin trading outcomes. Thus, staying informed and effectively managing risks is crucial to navigating potential margin calls and minimising losses.

Are you looking looking to open a Demat Account? Click here to get started. HDFC Bank assists you to engage in the stock market with the utmost ease and comfort. You can open a Demat and Trading Account and avail of facilities that assist in margin trading and currency and commodity trading. We assist in providing robust research services and enhancing your trading experience.

*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in the securities market are subject to market risks; read all the related documents carefully before investing.