What is a Margin Call & When Will You Recieve One?

Risk is the engine of the stock market. Without risk, there would be no way to make money as your stock prices rise. Of course, the same risk that inflates stock prices one day can deflate them the next. For the average stock market investor, the normal risk of the market is enough to satisfy their financial goals without keeping them up at night. But for those who are using borrowed money to increase their presence in the stockmarket, extra care must be taken.

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What is a Margin Call?

Aside from the usual market fluctuations, using a margin loan exposes you to the added risk of a margin call. This occurs when your current loan balance exceeds your borrowing limits plus your buffer. Most banks provide a buffer to accommodate market fluctuations above your borrowing limits.

When will you receive a margin call?

You can expect a margin call when the value of your security falls and the amount outstanding exceeds the borrowing limit by more than the buffer. Typically, your lender will build-in a buffer to the value of your investment. It is usually:

  • 5% for shares with a LVR of more than 75%
  • 10% for shares with a LVR of 75% or less
  • 10% for managed funds

How does it happen?

After trading closes at night and your stocks are on the wrong end of the market, you can expect a margin call the next morning. Most often your broker will call or email you, but you may be contacted by your lender direct if they have been unable to contact your broker (or if you don?t have one).

What to do next?

The bad news is that you have to stump up the cash, generally within 24 hours. If you haven?t got the cash, you may be able to transfer approved stocks to the portfolio. The extra bad news is that if all else fails, the broker or the bank will sell your share parcel to the equivalent figure that gets your loan back under the LVR. There goes any potential profit but at least it allows you to stay in the game.

To help protect you from fluctuations in the share market that could result in a margin call the following buffers are currently ‘built-in’ to the value of your investment:

  • 5% for shares with a LVR of more than 75%
  • 10% for shares with a LVR of 75% or less
  • 10% for managed funds

It is expected that whilst you are in buffer you take action to bring your account below the appropriate LVR to help manage your risk of being in a margin call.

The final step

Don?t forget to contact your lender or broker and confirm that the margin call has been met. Whether you transfer money into your margin loan account by direct deposit or electronic transfer, whether you transfer additional approved securities to increase your security value, or whether you sell sufficient quantities of your portfolio and use the proceeds to reduce the loan balance to within the borrowing limit – make sure you notify you margin lender that the margin call has been met.

Ways to reduce the chance of another margin call

  • It?s your responsibility to monitor your facility to avoid a margin call. Log on to Internet Account Access regularly to monitor your portfolio and loan.
  • Hold a diversified portfolio across a broad range of sectors.
  • Reinvest any investment income back into your loan and make regular interest payments.
  • Ensure your investment time frame is long-term, ideally greater than 5 years.
  • Get advice from a qualified adviser if you are not confident managing your own portfolio.
  • Take action when you are approaching buffer rather than wait for a margin call.

For more general margin loan information, read our latest Margin Loan Star Ratings report.

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