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Margin Call

Definition

Margin Call is a 2011 American drama film written and directed by J. C. Chandor. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the financial crisis of 2007–08. In focus are the actions taken by a group of employees during the subsequent financial collapse. The ensemble cast features Kevin Spacey, Paul Bettany, Jeremy Irons, Zachary Quinto, Penn Badgley, Simon Baker, Demi Moore, and Stanley Tucci.

A margin call is essentially a broker’s tool where he or she can demand an investor to deposit additional money on invested securities so that a minimum maintenance level of a margin account is accommodated for by the investor.

Margin Calls are usually made by brokers who run margin accounts. These are fundamentally brokerage accounts in which the broker lends cash to a customer so they are able to buy securities from the stock market. The collaterals for the account are the securities value and the cash invested itself.

In a margin account, it is important to know that if the value of the stock drops considerably, then the account holder receives a margin call from the broker to deposit more cash, or sell the portion of the stock in their possession.

On the other hand, a maintenance margin is the bare minimum value of ownership that an investor must maintain in a margin account. Maintenance margins for most securities or stocks in trade are often kept at 25% by brokers. However many brokers can have even higher maintenance margins that can be around 30 to 40%.

Working Formula:

Margin Call is made when:

(Market Value of Invested Securities – Broker’s Invested Cash) ÷ (Market Value of Invested Securities) % << Maintenance Margin % specified by the broker.

Example:

Jordan wants to invest in a security that has a market value of $50,000. He asks a broker to open a margin account in which his equity or ownership is 50% i.e. $25,000. However the next day the value of the invested security falls down to $30,000. This would result in the broker’s share of the security to become a major portion of the invested capital and the investor’s share falls down to $5,000. Since the bare minimum of 25% margin requirement has been breached, the broker will make a margin call to the investor to deposit more cash to the account or sell off some of the invested security in order to meet the maintenance margin obligation.

On the other hand if we consider the same scenario, but instead of stock price falling, it increases to $70,000 then the situation would not require a margin call from the broker. This is because when the security or stock value is raised, then the invested share of the investor is also raised, leaving the broker much more safe than before.


Further Reading


'Margin Call': using film to explore behavioural aspects of the financial crisis
link.springer.com [PDF]
… The film's focus on motivations, behaviours and rationalisations in a situation that calls for a decision … The aim of this article was to set out how the film Margin Call and the … of the film (http://www.ropeofsilicon.com/Images/web/template/awards/2012/scripts/margincall.pdf (Chandor …

Share pledges and margin call pressureShare pledges and margin call pressure
www.sciencedirect.com [PDF]
… The film's focus on motivations, behaviours and rationalisations in a situation that calls for a decision … The aim of this article was to set out how the film Margin Call and the … of the film (http://www.ropeofsilicon.com/Images/web/template/awards/2012/scripts/margincall.pdf (Chandor …

Giving Form to Finance Culture: Neoliberal Denizens in Giving Form to Finance Culture: Neoliberal Denizens in
www.jstor.org [PDF]
… The film's focus on motivations, behaviours and rationalisations in a situation that calls for a decision … The aim of this article was to set out how the film Margin Call and the … of the film (http://www.ropeofsilicon.com/Images/web/template/awards/2012/scripts/margincall.pdf (Chandor …

Option strategies: Good deals and margin callsOption strategies: Good deals and margin calls
www.sciencedirect.com [PDF]
… The film's focus on motivations, behaviours and rationalisations in a situation that calls for a decision … The aim of this article was to set out how the film Margin Call and the … of the film (http://www.ropeofsilicon.com/Images/web/template/awards/2012/scripts/margincall.pdf (Chandor …

Demystifying Dimensions of Ethical Behaviour: through the Lens of South Park" Margaritaville"," The Big Short" and" Margin Call"Demystifying Dimensions of Ethical Behaviour: through the Lens of South Park" Margaritaville"," The Big Short" and" Margin Call"
search.proquest.com [PDF]
… The film's focus on motivations, behaviours and rationalisations in a situation that calls for a decision … The aim of this article was to set out how the film Margin Call and the … of the film (http://www.ropeofsilicon.com/Images/web/template/awards/2012/scripts/margincall.pdf (Chandor …

Margin trading bans in experimental asset marketsMargin trading bans in experimental asset markets
www.econstor.eu [PDF]
… The film's focus on motivations, behaviours and rationalisations in a situation that calls for a decision … The aim of this article was to set out how the film Margin Call and the … of the film (http://www.ropeofsilicon.com/Images/web/template/awards/2012/scripts/margincall.pdf (Chandor …

Leverage causes fat tails and clustered volatilityLeverage causes fat tails and clustered volatility
www.tandfonline.com [PDF]
… The film's focus on motivations, behaviours and rationalisations in a situation that calls for a decision … The aim of this article was to set out how the film Margin Call and the … of the film (http://www.ropeofsilicon.com/Images/web/template/awards/2012/scripts/margincall.pdf (Chandor …



Q&A About Margin Call


Is there any other way to get out of this situation besides selling your investment?

Yes, you could borrow more money from your broker if you have not reached your maximum allowed borrowing limit with them yet.

What are the collaterals for a margin account?

The collaterals for the account are the securities value and the cash invested itself.

What is a margin call?

A margin call is essentially a broker's tool where he or she can demand an investor to deposit additional money on invested securities so that a minimum maintenance level of a margin account is accommodated for by the investor.

How does one receive a margin call from their broker?

If the value of stock drops considerably, then investors receive a margin call from their brokers to deposit more cash, or sell some of their stocks in possession.

When do most brokers set up maintenance margins at 25%?

Maintenance margins for most securities or stocks in trade are often kept at 25 by brokers. However many brokers can have even higher maintenance margins that can be around 3 to 4.

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