Imagine you have $10,000.
You decide to buy $20,000 worth of stocks.
Where does the extra $10,000 come from?
Your broker lends it to you.
At first, everything looks great.
The stocks rise 10%.
Your $20,000 portfolio becomes:
$22,000
You still owe the broker:
$10,000
So your equity has risen to:
$12,000
But then the market turns.
Your $20,000 portfolio falls to:
$15,000
You still owe:
$10,000
Your equity is now only:
$5,000
Then you receive an unpleasant message from your brokerage:
Margin call.
You may be required to deposit more money or securities into the account.
And if you don't meet the requirements, the broker may sell your investments.
In some circumstances, the broker can sell securities without waiting for you to respond. FINRA and the SEC both warn that brokerage firms can liquidate positions when an account falls below applicable maintenance requirements, and a firm may not be required to give you advance notice before doing so.
This is why margin trading can transform an ordinary market decline into a much bigger financial problem.
But there's an even more important reason to understand margin calls:
When many leveraged investors are forced to sell at the same time, their selling can put additional pressure on asset prices.
That can create a feedback loop.
Prices fall.
Investors lose equity.
Margin calls increase.
Investors sell.
Prices fall further.
More investors become forced sellers.
This doesn't happen every time markets decline. But financial regulators have documented this mechanism during periods of severe market stress.
So what exactly is a margin call?
And why can borrowed money make a normal stock-market decline much more dangerous?
What Is Margin Trading?
Margin trading means borrowing money from a brokerage firm to buy securities.
Instead of using only your own money, you combine:
Your money + borrowed money
to control a larger investment.
For example:
You have:
$10,000
Your broker lends:
$10,000
You buy:
$20,000 of stock
You now control twice as much stock as you could have purchased with cash alone.
That sounds attractive when prices are rising.
But leverage works in both directions.
If the investment rises, your return on your own money can be amplified.
If the investment falls, your loss on your own money can also be amplified.
And unlike a normal cash purchase, you still owe the broker the money you borrowed.
The SEC warns that investors using margin can lose more than the amount they originally invested.
Why Would Anyone Borrow Money to Buy Stocks?
Because leverage can increase potential returns.
Suppose you have:
$10,000
and buy $10,000 of stock.
The stock rises 20%.
Your investment becomes:
$12,000
You made:
$2,000
That's a:
20% return
on your money, before costs.
Now imagine you use $10,000 of your own money and borrow another $10,000.
You control:
$20,000
The stock rises 20%.
Your position becomes:
$24,000
You repay the broker's:
$10,000
and you're left with:
$14,000
Your own money has increased from:
$10,000 → $14,000
That's a:
40% return
before interest and other costs.
That's the attraction of leverage.
But now let's reverse it.
The Same Leverage Can Make a Loss Twice as Painful
You invest:
$10,000 of your own money
and borrow:
$10,000
You buy:
$20,000
of stock.
The stock falls 20%.
Your investment becomes:
$16,000
You still owe:
$10,000
Your equity is now:
$6,000
You started with:
$10,000
Now you have:
$6,000
That's a:
40% loss
on your original money.
The stock only fell 20%.
Your equity fell 40%.
That's leverage.
And It Gets Worse as the Market Falls
This is where margin calls become important.
Your broker doesn't simply ask:
"Did the stock fall 20%?"
The broker looks at the amount of equity remaining in your account relative to the value of the securities.
FINRA describes equity in a margin account as essentially the market value of the securities minus the amount owed to the firm. The account must maintain the required margin level.
So using our example:
Portfolio value = $16,000
Loan = $10,000
Your equity = $6,000
Your equity is:
37.5% of the portfolio
So you may still be above a particular maintenance requirement.
But if the stock falls further, the equation changes quickly.
What Is the Maintenance Margin?
A maintenance margin is the minimum amount of equity you are generally required to maintain after purchasing securities on margin.
For standard covered long equity positions, FINRA's general maintenance requirement is 25% of current market value, although brokerage firms may impose higher "house" requirements.
That distinction is extremely important.
The 25% number is not necessarily your broker's actual requirement.
A broker may require:
30%
40%
or more for certain securities or circumstances.
FINRA says firms can increase their house margin requirements and can do so without advance written notice in certain situations.
So two investors with identical portfolios can potentially face different margin requirements depending on their brokerage arrangements.
Here's a Simple Margin-Call Example
Suppose you have:
$10,000 cash
and borrow:
$10,000
You buy:
$20,000 of stock
Now imagine the stock falls.
Stock falls 10%
Portfolio:
$18,000
Loan:
$10,000
Equity:
$8,000
Equity percentage:
44.4%
No problem under a 25% maintenance requirement.
Stock falls 20%
Portfolio:
$16,000
Loan:
$10,000
Equity:
$6,000
Equity percentage:
37.5%
Still above 25%.
Stock falls 30%
Portfolio:
$14,000
Loan:
$10,000
Equity:
$4,000
Equity percentage:
28.6%
Still above 25%.
Stock falls 33.3%
Portfolio:
about $13,333
Loan:
$10,000
Equity:
about $3,333
Equity percentage:
25%
You've reached the general FINRA maintenance threshold.
A further decline can create a maintenance deficiency.
And that is where things can become dangerous.
Your Broker May Require More Than 25%
Now suppose your broker requires:
40% maintenance margin
using the same initial position.
You start with:
$20,000 stock
and:
$10,000 loan
Your equity is:
$10,000
At a 40% maintenance requirement, you need equity equal to 40% of the current stock value.
If your portfolio falls to approximately:
$16,667
you would have:
$6,667 equity
which is 40% of $16,667.
That means a decline of only about:
16.7%
from the original $20,000 could reach that threshold.
This is why investors cannot assume:
"My stock has to fall by 75% before there's a problem."
The actual threshold depends on the account and the broker's requirements.
FINRA specifically notes that firms can impose house requirements higher than the regulatory minimum.
What Actually Happens When You Get a Margin Call?
A margin call means your account does not have enough equity to satisfy the applicable requirement.
The broker may give you options such as:
Deposit cash
Deposit margin-eligible securities
or otherwise increase the equity in the account.
FINRA identifies depositing cash or eligible securities as ways to meet a margin call.
The exact process depends on the brokerage agreement and applicable rules.
But there is something investors often misunderstand.
A Broker Does Not Necessarily Have to Wait for You
This is one of the most important facts about margin accounts.
Many people imagine a margin call like this:
"Your broker sends you a warning, gives you three days, and you decide what to sell."
That's not necessarily how it works.
The SEC warns that a broker may have the right to sell securities without consulting you first when the account falls below its maintenance requirements.
FINRA similarly states that firms may sell securities without first notifying the customer and may sell enough securities to address the deficiency or, in some circumstances, even more.
That's why margin agreements matter.
The broker is protecting its own loan.
Why Would the Broker Sell Your Stock?
Think about what the broker has done.
It lent you money.
Your investments serve as collateral for that loan.
If the value of the collateral falls too far, the broker has a problem.
The broker wants to make sure that the assets securing the loan are worth enough to cover the amount you owe.
So when your equity falls below the required level, selling some securities can generate cash and reduce the outstanding loan.
It's similar in principle to a lender protecting itself when collateral becomes insufficient.
You May Not Get to Choose What Gets Sold
This is another common misconception.
You might have:
$20,000 of technology stocks
$10,000 of an index fund
$5,000 of a consumer company
and $10,000 cash borrowed from the broker.
You might think:
"If I get a margin call, I'll sell the technology shares."
Not necessarily.
The SEC warns that customers may not be entitled to choose which securities are liquidated to meet a margin deficiency.
The broker's rights depend on the account agreement and applicable rules.
That means you can lose a position you intended to keep simply because the broker needs to reduce the account's leverage.
A Margin Call Doesn't Mean the Stock Is Bad
This distinction is important.
Imagine you buy an excellent company on margin.
The business remains healthy.
Revenue continues growing.
Profits remain strong.
But the stock falls 35% because the broader market crashes.
You could still receive a margin call.
Why?
Because the broker isn't evaluating the long-term quality of the company.
It is evaluating:
The value of the collateral
relative to:
The amount you owe.
A good investment can therefore become a forced sale when leverage is involved.
What If the Stock Recovers the Next Day?
This is where margin calls can become especially painful.
Imagine:
Monday:
Stock falls sharply.
Brokerage requirements are breached.
Shares are liquidated.
Tuesday:
Stock rebounds sharply.
You no longer own the shares.
So you don't benefit from the recovery.
The SEC specifically warns that forced sales can happen at substantial losses and that the investor may then miss a later rebound.
This is one reason leverage creates a different kind of risk from ordinary investing.
Can You Lose More Than You Invested?
Yes.
This is one of the most important facts about margin.
Suppose you invest:
$10,000
and borrow:
$10,000
You control:
$20,000
If the stock falls 50%:
The position becomes:
$10,000
But you still owe:
$10,000
Your equity has effectively fallen to:
$0
And that's before considering interest, fees or the possibility that the position falls even further.
If the securities become worth less than the outstanding loan, you can still owe money after the broker sells them.
The SEC explicitly warns that margin investors can lose more money than they initially invested and can remain responsible for a shortfall after securities are sold.
Margin Interest Makes the Equation Even Harder
Borrowing money isn't free.
Your broker generally charges interest on the margin loan.
So the investment has to overcome:
Investment losses
plus:
Margin interest
plus potentially:
Trading costs and fees
before you actually make money.
That means even if the stock eventually rises, borrowing costs reduce your return.
Margin is therefore not simply:
"Free money that makes my gains bigger."
It is a loan.
And like other loans, it has a cost.
The Bigger Risk Is That Leverage Changes How You Behave
There's another problem that doesn't appear on a brokerage statement.
Suppose you buy a stock entirely with cash.
It falls:
20%
You may be unhappy, but you don't automatically owe anyone additional money because of that fall.
Now imagine the same investment bought with substantial leverage.
A 20% fall can bring you much closer to a margin requirement.
That changes the emotional pressure.
Suddenly you're not just thinking:
"Will the stock recover?"
You're thinking:
"Will the broker force me to sell?"
That's a completely different position.
Margin Calls Can Turn a Market Decline Into Forced Selling
Now we get to the part that makes margin calls relevant beyond individual investors.
Suppose thousands of investors are leveraged.
The market falls.
Some investors hit margin requirements.
They sell.
Their selling puts more downward pressure on prices.
Other leveraged investors see their equity fall.
They receive margin calls.
They sell.
Prices fall further.
More investors breach requirements.
This can create a feedback loop.
The Federal Reserve has described how forced sales following margin calls can put further downward pressure on asset prices and create negative feedback loops during periods of financial stress.
This does not mean margin calls cause every market crash.
Market crashes have many causes.
But leverage can make a sharp decline more difficult to absorb.
The 1987 Crash Provides a Famous Example
On October 19, 1987, the S&P 500 fell about 20% in a single day.
It remains one of the most dramatic one-day declines in modern U.S. stock-market history.
The Federal Reserve later described the enormous margin calls and liquidity pressures that accompanied the crash. Powell noted that margin calls were about 10 times their normal size, while some participants who couldn't meet them were forced to liquidate positions.
This doesn't mean margin calls alone caused the 1987 crash.
There were multiple interacting factors.
But it demonstrated something important:
When leveraged positions and falling asset prices collide, liquidity can become a problem extremely quickly.
The Same Mechanism Appeared During the Global Financial Crisis
The financial crisis also showed how leverage can interact with falling asset prices.
As the value of collateral fell, lenders became more concerned about the value of the assets backing loans.
That could lead to:
Higher margin requirements.
Forced sales.
Less available credit.
Lower asset prices.
More collateral calls.
The Federal Reserve described this as a potential vicious cycle of forced selling, increased volatility and higher margin calls during the financial crisis.
The important lesson is not that every margin call becomes a financial crisis.
It's that leverage can make falling prices feed back into financing conditions.
Margin Calls Aren't Only About Stocks
The idea of margin extends beyond buying stocks with a brokerage loan.
Margin can appear in:
Short selling
Options strategies
Futures
Certain derivatives
Other leveraged financial positions
The exact rules differ significantly between products.
FINRA notes that margin accounts are also used for short selling and for many options strategies.
That's why the phrase "margin call" can describe somewhat different situations depending on what someone is trading.
Short Sellers Can Face Margin Problems Too
Suppose you believe a stock is going to fall.
You borrow shares and sell them.
Later, you hope to buy them back at a lower price.
But what happens if the stock rises instead?
The value of your short position moves against you.
The broker may require more collateral.
If you can't meet the requirement, the position may be liquidated.
This is one reason short selling can be extremely risky.
Unlike buying a stock, where the theoretical loss is limited to the amount invested, a short position can theoretically lose much more because a stock's price has no fixed upper limit.
Why Brokers Can Raise Margin Requirements
Here's another surprising point:
You don't always have to lose money first.
Your broker can increase the maintenance requirement on a security or account.
FINRA says firms may increase house margin requirements, including when a stock experiences large price swings, becomes distressed, is delisted or faces other risks.
Imagine:
Yesterday your broker required:
30%
Today the broker requires:
40%
Your portfolio hasn't changed.
But your required equity has.
That can create a margin deficiency even without a new purchase or an additional market decline.
This is another reason investors need to understand the specific terms of their brokerage account.
Why High-Volatility Stocks Can Be Especially Dangerous on Margin
Imagine two stocks.
Stock A
Moves about:
1–2%
on an average day.
Stock B
Regularly moves:
8–10%
in either direction.
A broker faces a very different risk when lending money against Stock B.
A large overnight or intraday price move can rapidly reduce the value of collateral.
So brokers may impose higher margin requirements on particularly volatile securities.
FINRA specifically notes that firms can impose higher house requirements on securities they consider particularly vulnerable to large daily price swings.
A Margin Account Is Not the Same as a Cash Account
This distinction is important for beginners.
Cash account
You generally pay the full purchase price using your own available funds.
Margin account
The broker can lend against your eligible securities and account equity, allowing you to trade with borrowed money under the account's rules.
The second creates more flexibility.
But it also creates additional risks.
The SEC specifically describes margin accounts as substantially riskier than cash accounts because investors can lose more than they initially put in and can face forced liquidation.
Why Do People Use Margin Despite the Risk?
Because leverage can be useful in certain strategies.
An experienced investor might use borrowed funds because they have a strong conviction about an investment and want to increase their exposure.
A trader may use margin because certain strategies require it.
A short seller needs a margin account.
Some investors use leverage as part of a broader portfolio strategy.
But there is a crucial difference between:
Using leverage deliberately
and:
Using leverage because you cannot afford the investment without it.
The second situation creates much less room for error.
A Margin Call Is Not the Same as a Market Crash
It's easy to confuse these terms.
A margin call happens at the account or position level.
A market crash happens across a broad market.
One investor receiving a margin call does not mean the market is crashing.
Likewise, a market can fall significantly without causing widespread margin calls.
It depends on:
How much leverage investors are using.
How much collateral they have.
The size of the decline.
Broker requirements.
Liquidity.
Investor behavior.
And the speed of the price movement.
Why a 10% Market Drop Can Be Manageable for One Investor and Devastating for Another
Consider two investors.
Investor A
Invests:
$100,000 cash
Market falls:
10%
Portfolio:
$90,000
They don't owe anyone money.
They may be unhappy, but nothing forces them to sell merely because the market fell.
Investor B
Invests:
$50,000
and borrows:
$50,000
Portfolio:
$100,000
Market falls:
10%
Portfolio:
$90,000
Loan:
$50,000
Equity:
$40,000
The market fell 10%.
But the investor's equity fell:
20%
That's the effect of leverage.
As the market decline grows, the difference becomes increasingly dramatic.
The Hidden Problem Is Time
Without leverage, an investor may be able to wait.
Maybe the stock falls 30%.
Then the business improves.
The stock eventually recovers.
With margin, time can become your enemy.
Interest continues accumulating.
Collateral requirements continue to apply.
A further price decline can force a sale.
You may therefore be unable to wait for the recovery that would have saved the investment.
That's one of the most important differences between:
being right eventually
and
being able to stay invested long enough for the thesis to work.
What Should You Do If You Receive a Margin Call?
The exact response depends on your brokerage agreement and financial circumstances, but the first priority is understanding the size and timing of the deficiency.
FINRA lists depositing cash or margin-eligible securities as methods for meeting a margin call.
You should also understand:
How much you owe
What the current equity is
What maintenance requirement applies
Whether the broker has raised the requirement
Whether liquidation can occur immediately
How interest is being charged
What assets are eligible as collateral
The most important mistake is assuming you have several days simply because you received a message that looks like a warning.
Your broker's agreement determines the actual rights and procedures.
What Can You Do Before a Margin Call Happens?
The simplest answer is:
Understand your margin cushion.
FINRA specifically recommends knowing the amount by which your account's equity exceeds the maintenance requirement. This is sometimes referred to as your maintenance-margin excess or cushion.
Suppose your account is just barely above the minimum.
A relatively small market decline could create a problem.
If there is substantial excess equity, the account has more room to absorb volatility.
Again, the exact calculation depends on the brokerage firm's rules and the securities in the account.
Don't Assume Your Broker Uses Only the Regulatory Minimum
This is perhaps the most practical lesson in the entire article.
You might read:
"25% maintenance margin"
and assume your account will always be safe until then.
But FINRA's rules allow firms to impose higher house requirements.
A particular stock could have:
30%
40%
or even substantially higher requirements depending on circumstances and the broker's policies.
The broker's own agreement therefore matters.
Why Margin Calls Can Happen So Fast During Market Stress
In a normal market, a stock may move:
1%
or:
2%
in a day.
There is plenty of time to react.
During a market shock, a stock can move dramatically in hours.
That means an account can go from:
comfortably above requirements
to:
near a margin threshold
very quickly.
FINRA notes that some firms monitor margin intraday and may issue or act on margin deficiencies during the trading day rather than waiting for the end of the day.
That makes leverage particularly sensitive to fast-moving markets.
Could Margin Calls Make a Bad Day Worse?
Yes.
Think of a chain:
Stock price falls
↓
Account equity falls
↓
Margin requirement is breached
↓
Investor must add cash or securities
↓
Investor cannot add enough
↓
Broker sells securities
↓
Selling pushes prices lower
↓
Other leveraged investors lose more equity
↓
More margin requirements are breached
That is the basic feedback loop.
The Federal Reserve has described how forced asset sales associated with margin calls can create further downward pressure on asset prices and contribute to negative feedback loops during episodes of stress.
Again, this doesn't mean every margin call causes a crash.
It means leverage can amplify an existing market decline.
The Difference Between Leverage and Risk Is Important
Leverage doesn't guarantee losses.
It magnifies outcomes.
If your investment rises:
Leverage can magnify gains.
If your investment falls:
Leverage can magnify losses.
And if the decline becomes large enough:
Leverage can force you out of the investment.
That's the part people often underestimate.
The biggest risk isn't simply losing money.
It's losing your ability to decide when to sell.
Why Margin Calls Matter to Everyone, Even People Who Don't Use Margin
You might think:
"I never borrow money to buy stocks, so why should I care about margin calls?"
Because leveraged investors are part of financial markets.
When heavily leveraged investors are forced to sell, their actions can affect prices for everyone else.
If you own the same stock with cash, you could still see its price fall because other investors are being forced to liquidate leveraged positions.
This is one reason regulators and central banks pay attention to leverage and liquidity during periods of market stress.
The Federal Reserve has repeatedly discussed how leverage, margin calls and forced selling can interact to amplify market moves.
The Biggest Misunderstanding About Margin
Many people think margin means:
"I am borrowing money so I can make more money."
That's only half the story.
The more important definition is:
"I am borrowing money, so my investment outcome is now larger relative to my own capital—and the lender has rights over the collateral."
That second sentence explains the real risk.
You aren't just taking more market exposure.
You're also accepting an obligation to the lender.
The Simple Formula to Remember
At its most basic:
Account equity = market value of securities − amount owed to broker
The larger the debt, the smaller your equity cushion.
And because the market value changes every second while the debt doesn't automatically fall just because your stock fell, your equity can disappear surprisingly quickly.
That's why leverage requires much more caution than a fully paid cash investment.
The Bottom Line
A margin call occurs when the equity in a leveraged brokerage account falls below the applicable margin requirement.
The investor may need to provide additional cash or eligible securities, and the brokerage firm may have the right to sell securities to protect the loan.
Under FINRA's general maintenance rule for long margin securities, equity generally must remain at least 25% of the current market value, but brokerage firms can impose higher house requirements.
The danger is that leverage changes a normal market decline into a much larger loss on the investor's own money.
And in stressed markets, forced selling by leveraged investors can potentially create a feedback loop:
falling prices → margin calls → forced selling → lower prices → more margin calls.
The Federal Reserve has documented this kind of dynamic during historical periods of severe market stress, including the 1987 crash and the global financial crisis.
The important lesson isn't that margin is always bad.
It's that borrowed money changes the rules of an investment.
Without leverage, you may be able to wait for a market recovery.
With leverage, the market may force you out before that recovery arrives.
That's why the most important question isn't:
"How much can I borrow?"
It is:
"How much of a decline can I survive without being forced to sell?"
Because when you invest with borrowed money, the market doesn't have to reach zero to create a serious problem.
It only has to fall far enough that your collateral is no longer sufficient for your loan.
And once that happens, the decision about whether to sell may no longer belong entirely to you.
Sources
FINRA — Know What Triggers a Margin Call
Explains how margin calls can be triggered by falling account values, insufficient buying power or higher house requirements; also explains maintenance margins and forced liquidation.
FINRA Rule 4210 — Margin Requirements
Provides the formal maintenance-margin requirements applicable to customer accounts, including the general 25% requirement for long margin securities.
U.S. Securities and Exchange Commission — Margin: Borrowing Money to Pay for Stocks
Explains initial and maintenance margin, the possibility of losing more than the initial investment, interest costs and a broker's ability to liquidate securities.
Federal Reserve — Financial Regulation in the Wake of the Crisis
Discusses the relationship between falling asset prices, margin calls, forced asset sales and negative feedback loops during periods of financial stress.
Federal Reserve — Speech on Central Clearing and Liquidity
Describes the extreme margin calls and forced liquidations associated with the 1987 stock-market crash.
Federal Reserve — Financial Instability and the Federal Reserve as a Liquidity Provider
Provides historical discussion of margin calls, liquidity pressures and forced selling during major periods of market stress.
Disclaimer
The information published by The Margin Stream is provided for general informational and educational purposes only. It does not constitute personalized investment, financial, tax, legal or other professional advice. Margin trading and other forms of leverage can result in losses exceeding the amount initially invested. Margin requirements, liquidation policies, interest rates and other terms vary by brokerage firm, security and account type. Readers should review their brokerage agreement and understand the risks before using borrowed funds to invest.
Muhammad Akif
Founder & Editor
The Margin Stream