Margin Call

Some investors buy stocks not only with their own money but also borrow additional funds from their broker. A broker is the company through which one buys and sells securities. As collateral, the investor must contribute a share of their own money, known as the margin. If the price of the purchased securities falls, this collateral share shrinks. If it drops below an agreed threshold, the broker gets in touch: the customer must pay in more money or provide additional collateral. This exact demand is called a margin call.

Why a margin call can send entire markets sliding

For the individual investor, a margin call is unpleasant because it puts them under time pressure. Deadlines are often short, sometimes just a few hours. Anyone who cannot pay loses control over their position. The broker then sells on their own, without waiting for a better price.

For the market as a whole, margin calls are dangerous because they reinforce each other. Falling prices trigger margin calls. Those who cannot pay must sell. These sales push prices down further, which triggers new margin calls. Experts call this a downward spiral.

This is exactly what happened in 2021 with the fund Archegos Capital. It had built up enormous stock positions using borrowed money. When prices fell, it could no longer meet the margin calls. The banks involved sold at breakneck speed, and Credit Suisse alone lost around five billion dollars in the process.

How the broker calculates the collateral threshold

An example makes the calculation tangible. An investor buys stocks worth 20,000 euros, of which 10,000 euros is their own money and 10,000 euros is borrowed. Their equity share is thus 50 percent. The broker might require that this share never fall below 30 percent.

Now the price falls by a third. The securities are now worth 13,400 euros, while the loan remains at 10,000 euros. The investor therefore owns only 3,400 euros, roughly 25 percent. The threshold has been breached, and the margin call arrives. The investor must transfer money or sell part of the shares.

Today, this monitoring runs automatically. Computer systems continuously revalue the accounts, for some products every second. That’s why margin calls today usually don’t come by phone call but as a notification in the app. In particularly fast-moving markets such as cryptocurrencies, the systems even liquidate positions without any warning. The investor only realizes afterward that their position has been closed.

Margin calls in market news and trading apps

In the news, the term usually appears on turbulent trading days. It is then reported that sales were triggered by margin calls. This is a sign that selling was not driven by conviction but by compulsion. Such moves are often more severe than the news situation alone would explain.

This is also relevant in the AI and tech space. Many technology stocks fluctuate sharply, and it is precisely there that trading on credit is common. If a highly valued stock drops 20 percent, leveraged investors quickly come under pressure. This technically amplifies the price collapse.

A common misconception: that a margin call is merely a warning that can be ignored. The opposite is true. If the customer does not react, the broker sells at the most unfavorable moment possible. Related but not identical is the concept of leverage. Leverage describes how strongly borrowed money magnifies gains and losses. The margin call is the bill that this leverage presents in the event of a loss.