When you buy stocks on margin, your broker lends you money for a portion of the purchase price. To make sure you can repay your debt, regulators require you to keep a maintenance margin, or a minimum amount of equity in your account. Equity is the portion of your stocks’ value that you don’t owe your broker -- similar to equity in a home. It’s important to monitor your maintenance margin. If your stocks decline and your equity dips below your maintenance margin, you’ll get a margin call -- a request from your broker to cough up more cash.
Log in to your margin account and look up the number of shares of each stock you own, each stock’s share price and your margin loan balance (the amount you’ve borrowed from your broker). For example, assume you own 200 shares of a $20 stock and 100 shares of a $35 stock. Assume your margin loan balance is $4,000.
Multiply the number of shares of each stock by its share price. In this example, multiply 200 by $20 to get $4,000. Multiply 100 by $35 to get $3,500.
Add your Step 2 results. In this example, add $4,000 and $3,500 to get $7,500.
Look in your margin account agreement or on your broker’s website to find out the minimum maintenance margin percentage your broker requires. Your margin account agreement is one of the documents you signed when you opened your account. Regulators set the minimum maintenance margin at 25 percent, but your broker might require a higher percentage. In this example, assume your broker requires a 30-percent maintenance margin.
Multiply this percentage by your Step 3 result to calculate your required maintenance margin. In this example, multiply 30 percent, or 0.3, by $7,500 to get a maintenance margin of $2,250. This means the equity in your margin account must be at least $2,250.
Subtract your margin loan balance from your Step 3 result to calculate your equity. In this example, subtract $4,000 from $7,500 to get $3,500 in equity.
Check if your equity in Step 6 is more than your required maintenance margin in Step 5. If it is, you have sufficient equity. If not, you‘ll get a margin call and must deposit more funds. Concluding the example, your $3,500 of equity is more than your $2,250 required maintenance margin. You’re in the clear as long as your stocks don’t decline.
- When your equity gets low, you can deposit more cash to avoid a margin call. If you get a margin call and don’t add more money, your broker can automatically sell your stocks, which might stick you with a loss.
- Your broker may have different maintenance margin requirements for different stocks and can usually change these at any time. Read your margin account agreement to find out the rules.