How do margin accounts work? When do you get a margin call?

Margin trading lets you amplify returns (and losses) by borrowing from your broker. Here's how it works step by step.

Setup:

• Initial margin: The minimum percentage you must deposit upfront (e.g., 50% under Reg T in the US)
• Maintenance margin: The minimum equity percentage you must maintain (e.g., 25-30%)
• Margin call: Triggered when your equity falls below the maintenance margin

Example:

Javier wants to buy 1,000 shares of Northfield Industries at $50/share.

• Total position value: 1,000 x $50 = $50,000
• Initial margin (50%): Javier deposits $25,000 cash
• Borrowed from broker: $25,000

Javier's equity = Market Value - Loan Amount

Margin call trigger price formula:

P* = Loan / (Shares x (1 - Maintenance Margin))

With 25% maintenance margin:

P* = $25,000 / (1,000 x 0.75) = $33.33

If Northfield drops to $33.33, Javier's equity is:

• Position value: 1,000 x $33.33 = $33,333
• Equity: $33,333 - $25,000 = $8,333
• Margin ratio: $8,333 / $33,333 = 25% (exactly at maintenance)

Below $33.33, Javier receives a margin call and must deposit additional funds or sell shares.

Leverage effect:

A 20% stock move becomes a 40% return on equity — leverage doubles the percentage gain AND loss.

Key points for the exam:

1. Interest on the margin loan reduces returns
2. The broker can sell your shares without consent during a margin call
3. Short selling also requires margin (see next question)
4. Leverage ratio = Total Assets / Equity = $50,000 / $25,000 = 2x

Exam tip: Memorize the margin call trigger price formula. The exam frequently provides initial margin, maintenance margin, and purchase price and asks at what price a margin call occurs.

Explore leverage and margin in our CFA Level I Equity module.