May 13, 2007, 4:27 am

What is a margin call?

by: The Financial Blogger    Category: Leveraging Strategies
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Depending on the amount that you want to leverage and your financial situation, your bank might request a margin call to be added to the value of your investment. In order to cover their risks banks are setting up a minimum value to the investment linked to your debt.

As an example, if you are borrowing 150K secured by 150K of investment, your financial institution might not want to see the investment go below 90% of its value. Therefore, they will set a margin call at 90% or 135K.

If your investments ever drop below this limit, your bank will call you and ask for more money to pledge as collateral. This transaction has to be done the same day. If you don’t have enough to put back your investment over the margin call limit. The institution has the right to sell your investment at the market price and pay off the loan.

As the value of the investment is less than your debt, the rest of the debt will become unsecured and monthly instalments will be requested to pay it off completely.

Many people are scared by margin calls as it would become a painful experience if the investments drop suddenly. On the other hand, the bank is watching your portfolio for you and it should be seen as an alarm ring instead of a threat. You are better off loosing 10% and closing your loan than waking up two months later at minus 30%!

This matter should be discussed before you apply for any leveraging loan. Please note that margin calls don’t apply on The Smith Manoeuvre as the debt is secured by a property and the investments are free of liens.

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