What is a Margin Call?

Definition:

If the securities you are using as collateral go down in price, your firm can issue a margin call. This is a demand that you repay all or part of the loan with cash, a deposit of securities from outside your account, or by selling securities in your account.

🤔 Understanding a margin call

Investing on margin means your brokerage firm lends you cash, using assets in your account as collateral, to purchase securities..

A margin call is a demand from a broker that you repay all or part of the loan with cash, a deposit of securities from outside your account (allowed by some brokers), or by selling securities in your account.

Margin calls are based on account, not a single holding. However, margin requirements may vary by security.

Example

As an example of margin, imagine you buy $2,000 worth of stock but only put up $1,000 of that margin, or security – a 50% margin or 2x leverage. Your $2,000 purchase is now paid for by your $1,000 cash paid on the transaction plus the $1,000 your broker has lent you. The broker is lending to you and using the stock as collateral. If the value of the stock falls such that your equity in the account falls below the required maintenance margin, then your broker will issue a margin call asking you to liquidate the position or deposit cash or securities to reestablish sufficient equity in the account. If you fail to timely act, your broker may liquidate your position.

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Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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What’s the idea behind margin trading?

One determinant of how much profit you make on an investment depends on the size of the investment. It is possible to borrow money to finance an investment position to potentially get higher profits. Borrowing, however, comes at a cost. If higher profits can be gained, losses can also magnify.

What is the risk of buying on margin?

Margin borrowing may not be suitable for all investors. The rules of margin borrowing are complex and it’s important that you fully understand the implications of leveraged investing.

Margin borrowing increases your level of market risk, as a result it has the potential to magnify both your gains and losses.

Firms that extend margin loans can change their maintenance margin requirements at any time without prior notice. If the equity in your account falls below the minimum maintenance requirements (which may vary by security), some brokerage firms allow you to deposit additional cash or acceptable collateral to keep your positions. If you fail to meet your minimums, your broker may be forced to sell some or all of your securities, with or without your prior approval.

Disclosures

Margin borrowing increases your level of market risk, as a result it has the potential to magnify both your gains and losses. Regardless of the underlying value of the securities you purchased, you must repay your margin loan.

Robinhood Financial can change their maintenance margin requirements at any time without prior notice.

If the equity in your account falls below the minimum maintenance requirements (varies according to the security), you’ll have to deposit additional cash or acceptable collateral. If you fail to meet your minimums, Robinhood Financial may be forced to sell some or all of your securities, with or without your prior approval.

For more information please see Robinhood Financial’s Margin Disclosure Statement, Margin Agreement and FINRA Investor Information.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

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