Margin Calls: What Happens When Leverage Goes Wrong
A margin call occurs when the equity in your brokerage account falls below the maintenance requirement — typically 25% to 50% of the position value. In 1929, margin calls triggered a cascade of forced selling that amplified the Great Crash. In 2021, a family office called Archegos Capital lost $20 billion in days from margin calls.
Margin trading allows you to borrow money from your broker to buy securities. You put up a percentage of the purchase price (initial margin, typically 50% for stocks) and borrow the rest. The securities you buy serve as collateral. If the stock price falls, your equity (the value of the securities minus the loan) decreases. If it falls below the maintenance margin requirement (typically 25% for stocks, higher for volatile securities), your broker issues a margin call — demanding that you deposit additional cash or securities to bring equity back to the required level.
If you cannot meet the margin call, your broker has the right to sell your securities without notice to bring the account back into compliance. This is called forced liquidation. The broker can sell any securities in your account — not just the margined position — and can sell at the current market price, which may be far below what you paid. Most critically, the broker has no obligation to get your permission or to get you the best price. Margin calls can happen in an instant — during the 2020 COVID crash, brokers issued margin calls and liquidated positions within hours as stocks fell 10%+ per day.
Real-world example: In March 2021, Archegos Capital Management, a family office run by Bill Hwang, defaulted on margin calls from Goldman Sachs, Morgan Stanley, and other banks. Archegos had used total return swaps to build highly leveraged positions in stocks like ViacomCBS, Discovery, and Baidu. When ViacomCBS shares fell 50% after a secondary offering, the banks demanded more collateral. Archegos could not meet the calls. The banks liquidated $20 billion in positions over three days, causing ViacomCBS to fall another 60%, Discovery to fall 50%, and Credit Suisse and Nomura to lose billions. The forced liquidation caused a mini financial crisis that wiped out $5 billion in bank capital.
How to Avoid Margin Calls
The simplest way to avoid margin calls is to not use margin. If you do use margin, maintain a significant cushion above the maintenance requirement — keep equity at 50% or more of position value, even though the minimum is 25%. Use margin only for highly liquid, diversified positions, not concentrated bets. Monitor positions daily and set stop-loss orders at levels that will trigger before a margin call. Keep cash reserves in your account to meet margin calls quickly. Understand that margin calls are more likely in volatile markets — during the 2008 crisis, some brokers raised maintenance requirements from 25% to 50% or higher, triggering margin calls even on positions that had not fallen. Avoid holding margin over weekends and holidays when markets are closed and you cannot respond to calls.
FAQs
How much can I borrow on margin?
For stocks, the initial margin requirement is set by the Federal Reserve's Regulation T at 50% — you can borrow up to 50% of the purchase price. For example, to buy $10,000 of stock on margin, you need at least $5,000 of your own money. Maintenance margin is 25%, meaning your equity must stay above 25% of the market value. Individual brokers can set higher requirements — many set maintenance at 30% to 50%. For volatile stocks, brokers may require 50% to 75% initial margin or prohibit margin entirely. For Treasury bonds, margin requirements are lower (as low as 2% to 10%). For options, margin requirements are complex and calculated using the broker's risk model.
Can I lose more money than I have in my account?
Yes — this is called a negative balance or deficiency. If your broker liquidates positions but the proceeds do not cover the loan, you owe the difference. The broker has the legal right to pursue you for the deficiency. In the 1929 crash, many margin borrowers received deficiency notices demanding payment of amounts far exceeding their original investment. During the 1987 Black Monday crash, some investors received margin calls before the broker could liquidate, and the liquidation proceeds were less than the loan amount. The risk of negative balances is highest in fast-moving markets where prices gap down before brokers can liquidate.
What is a margin call in a retirement account?
Margin is generally not available in traditional or Roth IRAs. The SEC and FINRA prohibit most margin trading in retirement accounts because the tax-advantaged nature of these accounts is not compatible with the speculative nature of leveraged trading. However, some brokers allow "limited margin" in IRAs for options trading and to settle trades more quickly. In these accounts, margin is used for settlement timing, not leverage. If you want to use leverage in a retirement account, you cannot — margin trading is restricted. The only exception is a "non-recourse" margin account, which few brokers offer.