Increased volatility in the market can sometimes bring about uncomfortable and surprising situations for investors, especially when it comes to margin calls.
When you buy stock on a margin, you’re essentially borrowing money from your broker to finance the purchase. While this is a strategy that can amplify your gains if the stock price goes up, it can also lead to painful losses if the stock price falls and you’re forced to sell other assets or put more money into your account to meet the margin call.
In this article you will learn everything there is to know about margin calls, including:
- what is a margin call;
- what triggers a margin call;
- what happens when you get a margin call;
- how long do you have to pay a margin call;
- what happens if you cannot pay the margin call;
- how you can avoid a margin call; and
- how to handle margin call liquidation.
In most, but not all cases, your broker will notify you of a margin call and give you a set amount of time to deposit more funds or securities into your account.
You typically will have two to five days to respond to a margin call.
Timeframes for responding to a call may vary depending on your broker and the circumstances. Regardless of the time frame, it is important that you take action as soon as possible.
IMPORTANT: If you aren’t able to meet the margin call fast enough or don’t have any extra funds to deposit, your broker may also force you to sell some of your securities at a loss in order to free up cash. This is known as forced liquidation. In fact, many margin account agreements allow brokerage firms to liquidate your portfolio at their discretion without notice.
When this occurs, your broker will issue a margin call in order to protect themselves from losses and to ensure that your account has enough funds to cover potential losses.
You’re then required to deposit additional funds or securities into your account to meet the call to bring your account back to the maintenance margin level. If you don’t make a deposit, your broker may sell some of your securities at a loss to cover the shortfall.
Margin calls can occur at any time, but tend to occur during periods when there is high volatility in the markets.
What happens when you get a margin call?
A margin call is most often issued these days electronically, through your broker’s online platform. You can also receive an email or other notification from your broker informing you of the margin call and how much money you need to deposit by a certain time.
What happens next depends on your broker and the situation.
If your broker is not worried about the situation, they may give you some time to raise the extra funds to deposit into your account. If they are worried, they may demand that you meet the call immediately or they may even sell some of your securities to cover the shortfall if you don’t have the extra cash on hand without notice.
Yes, a broker can sell your securities without your permission if you don’t have enough money in your account to meet a margin call. All of this depends upon the contract you signed when you opened your account which outlines the broker’s rights in these situations.
It’s important to remember that your broker will most likely be interested in protecting their own financial interests rather than yours, so you should make sure that you understand your rights and obligations before entering into a margin agreement.
Because they are not always required to give you time to meet a margin call, unless they are under contractual agreement to do so, they may not notify you before liquidating assets in your account to pay off any margin debt.
If this happens, your investment portfolio may suffer significant losses.
Unfortunately, even if you are in a position to meet the call, you may not be able to get your securities back if they have already been sold by your broker. When you opened up your margin account, you likely signed an agreement that gave your broker the right to sell your securities without notifying you first.
This is why it’s important to understand the terms of your margin agreement before signing it. You should also be aware of the risks involved in trading on margin.
MPORTANT: If your broker decides to sell your highly appreciated securities, you can be left with large deferred-tax liabilities as well as major capital gain tax expenses that must be paid in the relevant tax year. In addition, brokers can sell your securities within the margin account at an undervalued price, leaving you with even more investment losses.
How long do you have to pay a margin call?
The time frame for responding to a margin call can vary depending on your broker and the circumstances. Typically, brokers will allow from two to five days to meet the call. You will need to review your account agreement with your broker to be sure. Beware, most margin account agreements do not require the broker to give you any amount of time or notice before they liquidate.
What happens if you cannot pay the margin call?
Not meeting a margin call can have long-term consequences for your investment portfolio and your financial wellbeing, especially if it leads to you incurring debt to your broker.
If you were unable to meet a margin call, and the assets or securities your broker sold don’t cover the entire amount of debt, your broker will send you a bill for the remainder. Depending on the volatility in the market, this debt could be a substantially large amount of money.
Have no mistake, this unsecured debt is money that you owe to your broker and must be paid back.
Not paying back your debt to your broker can result in many serious consequences, and can affect your:
Your credit score will be negatively impacted if you default on your debt to your broker. This will make it harder for you to borrow money in the future when you may need it.
If you have business loans, you could find yourself in a position where you are required to pay the entire loan back immediately. You may also find it difficult to land a new job if your prospective employer checks your credit score.
A universal default may happen across all of your insurance policies. Your insurance rates, for example, might rise in states where it is allowed.
Your broker may decide to sue you to collect the debt you owe. The court may then garnish your wages or put a lien on your property, putting your real estate investments or other assets at risk.
Of course, this would be the last resort for your broker, but it is still a possibility if you are unable to repay the debt. If you are in this position, and you believe that you may have strong legal recourse against your broker, you should speak to a securities fraud attorney about your options.
How can you avoid a margin call?
The best way to avoid a margin call is to never open a margin account in the first place. Yes, this means you’ll miss out on the potential opportunity to magnify your gains, but it also means you won’t have to worry about the risks associated with margin trading.
If you do have a margin account, make sure to monitor it closely and only borrow what you can afford to pay back. Yes, leveraging can help you boost your returns, but only if you’re able to handle the risks involved with opening up a margin account.
It’s also important to remember that you can always close your margin account if you no longer want to trade on margin. If your margin for risk has changed, or if you can no longer afford the potential losses, simply call your broker and close the account.
This will protect you from further losses if the market turns against you.
What is Margin Call Liquidation?
Forced liquidation which is sometimes also called “margin liquidation” or “margin call liquidation” or “forced selling”, is the process where your broker sells some or all of the securities in your margin account to meet a margin call, without first asking you for the additional funds needed.
Despite how you may feel about your broker doing this, chances are this action was stipulated in the margin agreement you signed when you first opened the account.
Can an entire margin account investment portfolio be liquidated?
Yes, if the value of your securities in your portfolio falls below the minimum required equity percentage, your broker can force the sale of all securities, regardless of whether they are marginable or not.
This means you can suffer significant investment losses almost over night if the market takes a turn for the worse.
Related Read: Did Your Broker Sell Your Stocks Without Permission?
Can you take legal action if your broker liquidates your account?
If you find yourself with an account that is being liquidated, you might be wondering if there is any legal recourse you can take. In short, yes, it is possible to take legal action if you feel that your broker has not acted in good faith or in a manner consistent with industry standards.
Even though you may not have the right to appeal for margin calls or forced liquidations of all or part of your assets on short notice or without prior notice. It does not imply that the broker-dealer was blameless.
The most important question to ask is: what happened when the margin accounts were recommended by your broker or financial advisor to be opened in the first place.
In some cases, the recommendation to open the account may have been unsuitable for you.
In other words, your broker may be held responsible for the losses you incurred as a result of being forced to liquidate an account that was unsuitable for you based on your investment profile.
Note: If you have suffered significant investment losses as a result of being forced to liquidate a margin account, you should speak to an experienced securities fraud attorney about your legal options.
Have you suffered significant losses in your investment portfolio due to margin call liquidation?
If so, you may be able to take legal action and recover your losses.
The investment fraud lawyers at the Law Offices of Robert Wayne Pearce, P.A., have represented many investors who have been victims of broker fraud and negligence.
Not every investment loss is the result of fraud or negligence, and some margin calls and forced liquidations may have no legal remedy. But if you have suffered losses, we can help you determine whether you may have a claim.
We would be glad to discuss any of these cases and more importantly, your case, with you. Please contact us for a free consultation at 561-338-0037 or fill out one of our short contact forms.
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Broker fraud and negligence cases are complex. They often involve multiple parties, including the broker, the brokerage firm, and other professionals.
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Our attorneys have represented investors from all over the world and throughout the United States.
If there is a way to recover your investment losses, our team at the Law Offices of Robert Wayne Pearce will find it.
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If you have lost money due to margin call liquidation or forced selling, our attorneys would be happy to talk with you about your unique case and potential legal options.
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