Lesson 9 of 9
The margin call, computed
Reg T sets what you can borrow, FINRA sets when you get called. Compute the exact price at which a position is sold without you, in six steps.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Regulation T caps the initial loan at half the purchase, and FINRA Rule 4210 requires equity of at least 25 percent of market value thereafter.
- Those two numbers give an exact price at which a position is sold, and it can be computed before the position is opened.
- A one-third fall in a half-borrowed position removes two-thirds of the money committed, which is why leverage converts a drawdown into a loss.
Buying on margin means borrowing from the broker against the securities in the account. The loan is not a fixed-term arrangement. It is repayable when the collateral falls, and the broker decides when that is.
The useful fact is that the trigger price is not a mystery. It follows from two published requirements and one line of arithmetic.
One position, the price that ends it
- Purchase price$50.00
- Maintenance call price at 25 percent$33.33
The two requirements
Regulation T, set by the Federal Reserve Board, governs the initial loan. For a marginable equity it allows a broker to lend up to 50 percent of the purchase price, so half the money has to be yours on day one.
FINRA Rule 4210 governs the position afterwards. It requires that the account's equity, meaning market value minus the loan, stays at or above 25 percent of market value for a long position. Many brokers set their own house requirement higher than 25 percent, and they may raise it on a specific security without notice.
Computing the call price
From purchase to trigger, in six steps
- Buy 200 shares at $50.00. The position is worth $10,000.
- Borrow the Regulation T maximum: 50 percent, so $5,000. Your own money committed is $5,000.
- The loan does not change when the price moves. It stays at $5,000 until repaid.
- Equity is market value minus the loan. At the start that is $10,000 minus $5,000, so $5,000, which is 50 percent of market value.
- A call comes when equity falls to 25 percent of market value. Set market value minus $5,000 equal to 0.25 times market value. That gives 0.75 times market value equals $5,000, so market value is $6,666.67.
- Divide by 200 shares. The call price is $33.33.
The general form is worth keeping, because it works for any numbers.
Maintenance call price equals Loan per share divided by 1 − maintenance requirement.
Example$25.00 ÷ (1 − 0.25) = $33.33
What the fall actually costs
What happens at the call
The broker asks for cash or securities to restore the requirement. If they do not arrive, the broker sells, and the margin agreement almost always allows it to sell without contacting you first, to choose which holdings to sell, and to do so at whatever price the market offers.
This is the mechanism that makes a fall self-reinforcing across a whole market. Forced sellers appear at the same prices at the same time, and the selling is not a judgement about value. It is a requirement being met.
Two practical notes. Brokers can raise house requirements during stressed conditions, which moves the call price upward while the market is falling. And the interest on a margin loan accrues daily, so a position held through a long flat stretch loses money to the loan even if the price does not move.
Check yourself
Under Regulation T, how much can a broker lend on a $10,000 purchase of marginable equity?
- The full $10,000
- Up to $5,000, since the initial requirement is 50 percent
- $2,500
Show the answer
Answer: B.
Regulation T sets the initial loan at no more than 50 percent of the purchase price. The 25 percent figure is the maintenance requirement that applies afterwards.200 shares bought at $50 with a $5,000 loan. At what price does a 25 percent maintenance requirement trigger a call?
- $25.00
- $33.33
- $37.50
Show the answer
Answer: B.
Market value minus $5,000 equals 0.25 times market value, so market value is $6,666.67 and the price is $33.33. Equivalently, the $25 loan per share divided by 0.75.The price falls by a third and the position is half borrowed. What share of the money committed remains?
- Two-thirds
- One-third
- Half
Show the answer
Answer: B.
The loan absorbs none of the fall, so the whole fall lands on equity. A one-third fall on double the exposure removes two-thirds of the money committed.Sources
- Regulation T of the Board of Governors of the Federal Reserve System, on the initial extension of credit for the purchase of margin securities.
- FINRA Rule 4210, on maintenance margin requirements, which sets 25 percent of market value for long equity positions.
- SEC investor education material on margin accounts and margin calls, including the broker's right to sell without contacting the customer.
What this leaves out
- Every price and share count here is an invented round number, chosen so the arithmetic can be checked by hand. No real security is described.
- Broker house requirements are frequently higher than the regulatory minimum and can be raised without notice, so the computed call price is a floor rather than a promise.
- Interest, dividends, other holdings in the same account and pattern day trading rules all change the outcome and are outside this arithmetic.
- Nothing here is advice about any security, and nothing here recommends the use of borrowed money.