Trading in a margin account allows you to amplify your buying power by borrowing money from your brokerage. To trade on margin, you must deposit a minimum amount — known as the margin requirement — and your brokerage lends you the rest, holding your positions as collateral.
This leverage can boost your returns, but it comes with risks, including margin calls. Here's what you need to know about what a margin call is, what to do if it happens, and how to avoid it.
What is a margin call?
A margin call is a demand from your broker to deposit additional funds or securities into your margin account because its value has fallen below the required minimum, known as the maintenance margin.
The Canadian Investment Regulatory Organization (CIRO), which regulates investment dealers in Canada, sets the minimum margin requirements for securities. Brokers are allowed to set their own margin requirements, as long as they are higher than the minimums set by CIRO.
What causes a margin call?
A margin call can be triggered for several reasons:
The market value of your securities decreases: If the total value of cash and securities in your account drops below the margin requirement, your account no longer has sufficient collateral to cover the amount borrowed.
The margin requirement increases: Brokerages can change the margin requirement on a security at any given time due to factors like volatility, market conditions, or credit risk. If the new requirement causes your account to fall below the threshold, you'll face a margin call. Brokers are not required to notify you of margin rate changes.
You're shorting a climbing security: If you engage in short-selling and the market value of the security you shorted increases, your losses could lead to a margin call.
Interest has been charged to your account: Your brokerage charges interest on the amount you borrow. If this interest causes your account to fall below the margin requirement, you will be in a margin call.
Example of a margin call
Let's say you have $1,000 in your account and you want to buy a security with a 50% margin requirement. You can borrow up to $1,000 from the brokerage (represented by a negative cash balance), giving you $2,000 in total buying power.
After purchasing the security, your account looks like this:
Cash: -$1,000 (the amount you owe the brokerage)
Security: $2,000
Margin requirement: $1,000 (market value of the security × margin rate)
Margin call: $0 (cash + market value − margin requirement)
You are not in a margin call. But if the security drops by 10% a few days later, your account has changed:
Cash: -$1,000
Security: $1,800 (decreased by 10% from original value)
Margin requirement: $900 (market value of the security × margin rate)
Margin call: -$100 (cash + market value − margin requirement)
Because the combined value of cash and securities has fallen below the margin requirement, you're now in a margin call for $100.
What happens during a margin call?
When your account falls below the margin requirement, your broker may issue a margin call by phone, email, or other communication. Your account is then restricted to closing transactions — only trades that reduce the margin call are allowed.
Margin calls are payable on demand and usually include a date by which you must fund your account. Keep in mind that you are responsible for ensuring your account stays above the margin requirement. Brokers are not obligated to notify you when you are in a margin call, so familiarize yourself with your brokerage's terms and conditions.
If you fail to fund your account in time, your brokerage can sell some or all of your securities to bring your account above the margin requirement — without informing you beforehand. If you or your brokerage has to liquidate securities, you may be forced to sell at a loss, with applicable tax consequences.
What to do if you get a margin call
You can respond to a margin call by funding your account to an amount greater than or equal to the margin call. Your options include:
Selling securities in the account to free up cash
Transferring in cash or margin-eligible securities from another account
If you don't respond, or if extenuating market conditions exist, the brokerage may liquidate securities in your account to bring it back above the margin requirement.
If the brokerage has liquidated all positions and you still owe money (i.e., your account balance is a debit), your account is considered delinquent and you may face further restrictions.
Ways to avoid a margin call
There are several ways to lower the risk of a margin call:
Limit your leverage and leave a cushion: You are not obligated to use the entire loan amount your broker offers. Accepting less than the maximum gives you a greater equity share in your holdings and a bigger cushion to avoid a margin call.
Diversify your holdings: Holding a range of different securities may help you withstand market fluctuations and reduce the risk that a decline in a single security will significantly impact your account value.
Monitor your account regularly: If you're using margin, it's wise to check your account frequently. Some brokerages offer custom alerts that notify you when your account is approaching a margin call, giving you time to deposit additional funds if needed.
The bottom line
Margin calls are a reality of trading on margin, and understanding how they work is one of the most important steps you can take before borrowing to invest. If you know what triggers a margin call, how to respond, and how to manage your risk, you can make more informed decisions about whether margin trading is appropriate for you.
Always maintain a cushion above your margin requirements, monitor your account regularly, and have a plan in place for how you would respond if the value of your holdings drops. Margin trading can amplify your returns, but it can also amplify your losses — and a margin call can force you to sell at the worst possible time.
