To resolve a margin call, investors can close out a position, deposit securities or cash to meet the margin, or allow the broker to sell securities from the account. When investors open margin accounts, it is advisable to read the terms of the agreement with care so they will know what to expect when the broker issues a margin call. If investors do not respond to the request to address the margin requirement, the broker is allowed to sell securities from the investor's account without receiving explicit permission to do so.
In a margin account, investors borrow money from a brokerage to make investments. The law usually requires a minimum deposit in such accounts in the form of a percentage of the total loan. This can be provided in cash or securities. If the stocks an investor holds decline in value, the amount on deposit falls, and it is possible to fall below the margin requirement. The broker will issue a margin call to ask the investor to correct the issue.
Investors holding open positions can close them to resolve the margin call. This may involve buying or selling securities, depending on the position. The broker can execute these orders on request from the customer and will work on getting the best possible deal for them. If the investor was planning on closing the position anyway, this may be a sound solution to the problem.
Another option is to deposit more cash or securities. Investors should have funds available in other accounts and can rapidly transfer them to the broker to meet the margin requirement. The investor should alert the broker to expect an incoming transfer from another financial institution, so the broker knows not to sell securities to resolve the problem. If the broker does not receive the deposit or there is a problem, she will contact the investor.
The investor can also do nothing, forcing the broker to sell securities, or specifically tell the broker to sell some of the securities in the account. The broker will decide which securities to sell on the basis of current values and the need, unless the investor provides particular directions. Brokers want to protect the financial interests of their clients, and thus are unlikely to make poor sales decisions when selling securities to meet a margin call. If a client feels a broker has breached fiduciary duty with a sale, it can be grounds for a lawsuit.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.