Markets · 6 pages · 12 min

Why a margin call is a forced sale

When collateral falls, a margin lender can demand cash or sell the position to restore the cushion.

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From the opening

A margin loan finances a position and requires the owner to keep a cushion of equity against the collateral. When the position falls, the cushion thins, and the lender demands cash or more securities, or else sells, which is why a missed margin call becomes a forced sale. The opening covers falling collateral thins the cushion, the lender demands more cover, and a missed call is sold.

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Inside

Falling collateral thins the cushion
The lender demands more cover
A missed call is sold
Cash accounts have no call
Where the idea stops applying
A distinction worth keeping

Sources

Margin lending against securities
Maintenance margin and forced liquidation

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Why a margin call is a forced sale

From the opening

Inside

Sources

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