If you’ve ever traded stocks or other securities using a margin loan, you’ve probably heard the term margin call. For many investors, it’s a phrase associated with stress, urgency, and sudden losses. Understanding the concept and aspects of a margin call is important to investors who are looking to take out margin loans.
In this article, we break down what a margin call is, what triggers it and what investors need to do to ensure that the broker doesn't sell off their assets because they have failed to meet the minimum maintenance margin.
What is a margin call?
A margin call occurs when the value of an investor’s margin account falls below the broker’s required minimum level, known as the maintenance margin. This generally happens when securities purchased with borrowed money decline in value. When a margin call is issued, the investor has a few options to bring the loan back into balance. They must either deposit additional funds, add more securities, or sell some positions to restore the account to the required level. If the investor fails to act promptly, the broker may liquidate assets in the account to cover the shortfall, often without prior approval.
In Australia, the Australian Securities and Investments Commission (ASIC) sets the overarching regulations for margin lending and trading, including minimum margin levels.
What happens during a margin call?
When account equity falls below the maintenance margin:
The broker demands additional funds or securities
The response window may be very short
The broker can liquidate positions without prior approval
This makes maintenance margin one of the most critical risk factors in leveraged trading.
How margin calls work (step by step)
You open a margin position using borrowed funds
The market moves against your position
Your account equity drops below the required level
The broker issues a margin call
You must act quickly, or the broker may act for you
If the investor doesn’t respond in time, the broker can automatically sell their assets, often without asking for permission.
Margin call example
You buy $10,000 of stock using $5,000 of your own money
The broker requires a maintenance margin of 25%
The stock drops to $6,000 in value
Now your equity is:
$6,000 (asset value) – $5,000 (loan) = $1,000
Your equity percentage:
$1,000 ÷ $6,000 = 16.7%
Because this is below the 25% requirement, you receive a margin call.
Why margin calls are risky
Margin call can be risky investments because:
They often happen during sharp market drops
Investors may be forced to sell at the worst possible time
Losses can exceed the original investment
Investors usually have very little time to respond (24 hours maximum)
In extreme cases, investors or traders can end up owing money even after their positions are closed.
How to avoid margin calls
While margin calls can’t always be avoided, investors can reduce their risk with a few options:
Use lower leverage
Keep extra cash in their account as a buffer
Monitor positions frequently
Set stop-loss orders
Avoid margin trading in highly volatile markets
Short positions
Margin calls are an important risk management tool in the financial system, but they can have serious implications for inexperienced investors. They highlight the double-edged nature of leverage: while borrowing can increase returns in rising markets, it can also accelerate losses when markets fall. For this reason, investors using margin should closely monitor their accounts, understand their broker’s margin requirements, and be prepared for volatility. We recommend speaking to a financial professional before undertaking such commitments.
All investment products carry risk and are not suitable for all investors. The value of your investment may go down as well as up, which means you could get back less than your original amount put in. Options trading, margin lending and short selling carries a high level of risk, and you should only trade with money you can afford to lose. For margin lending and short selling, if the value of your collateral falls or your position moves against you, Tiger Brokers (AU) may be required to sell your holdings or close your positions without prior notice to meet margin requirements or limit potential losses. Please ensure you fully understand the risks involved and seek independent advice if necessary. Past performance is no guarantee of future results. Information provided by TBAU is not intended to be advice. If any advice is included, it does not take into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs. Please ensure you have read and understand the financial services guide, risk disclosure statements, relevant product disclosure statements and target market determinations, terms and conditions, and other disclosure and legal documents before making any decision about TBAU’s products or services.
Tiger Brokers (AU) Pty Limited, ABN 12 007 268 386, (“TBAU”), holds an Australian Financial Services Licence (AFSL) no. 300767.
