HOW TO HANDLE MARGIN CALLS FOR STOCK INVESTORS

Posted date: February 15, 2024 Updated date: 08/09/2024

Index

Call margin Also known as a margin call, is an important concept in the world of stock investment. This is a situation where a securities company requires investors to deposit more money or increase the number of collateral securities when the ratio of net assets/stock value falls below a specified level. This is to ensure liquidity and stability in stock transactions, avoiding risks for related parties.

1. What is the term Call Margin?

Margin is the act of investors borrowing more money from securities companies to increase their purchasing power of securities, then using the purchased securities as collateral. When the market price falls, the ratio of net assets/securities value is lower than the allowed maintenance margin ratio, the securities company will perform "call margin“.

For example, a securities company offers a maintenance margin ratio of 40%. The investor has 200 million VND and “margin” – borrows an additional 100 million VND from the securities company to buy stock A. The block of stock A is used as collateral for the loan.

Suppose the price of stock A drops 45%, if not using margin, the investor loses 90 million VND. But because using margin with a total purchasing power of 300 million VND, the value of the stock now is only 165 million VND, meaning 135 million VND "evaporated". Minus the loan from the securities company, the investor's net assets are 65 million VND.

To not be MARGIN CALL Margin call, stock investors need to note the following points:

  • Always be cautious when the market is falling sharply. Buying on margin when the market is volatile will increase the level of risk for investors. Especially when the stock price is low, your account will definitely plummet.
  • Diversify your portfolio to avoid the risk of a stock falling sharply and causing a margin call. Restructure weak stocks to reduce pressure, focus on potential stocks, and prepare for opportunities when the market recovers.
  • Always keep a steady mentality. When the market shows signs of recovery, investors often have FOMO mentality, wanting to recoup their losses, so they place orders. full marginHowever, investors should avoid bull trap because it will take more time and money.
How to Handle Margin Calls for Stock Investors

2. Margin trading status and control threshold

Margin trading status and control thresholds play an important role in maintaining liquidity and stability in the securities market. Status includes safe account, warning and margin call, reflecting the risk level of the transaction. Safe, warning and margin call thresholds stipulate the minimum margin ratio to ensure safety, warning and measures to be taken when approaching or exceeding the threshold. These regulations help protect the interests of both investors and securities companies against market fluctuations.

  1. Account Status:
    • Safe Account: Account with margin ratio maintained above safe level, no margin call risk.
    • Warning Account: Account is nearing control threshold, need to pay attention to avoid margin call.
    • Margin Call Account: The account has exceeded the control threshold and needs to make additional deposits or add assets.
  2. Control Threshold:
    • Safety Margin: The minimum margin ratio that ensures the safety of the transaction without the risk of margin call.
    • Warning Threshold: Marginal margin level, need to pay attention to avoid margin call.
    • Margin Call Threshold: The margin level has exceeded the warning level, requiring additional funds or asset disposal immediately.

For example:

  • Safety Threshold: 50%.
  • Warning Threshold: 45%.
  • Margin Call Threshold: 40%.

When margin ratio If the account balance approaches or exceeds the warning threshold, investors will receive a warning from stock investment apps via email or text message. If the margin ratio falls below the margin call threshold, investors must quickly deposit additional funds or liquidate assets to avoid margin calls and loss of collateral.

Each brokerage firm has different rules for margin calls. Typically, investors will receive a call or text message notifying them of the decision. Others use email to send multiple calls depending on the client’s margin level.

For example, Securities Company B will send a warning letter to the customer when the account margin ratio is only 5% higher than the maintenance margin ratio. When the account falls below the maintenance level, the company will send a "margin call" letter to request additional assets.

Below are examples of the status and control thresholds when trading margin of securities companies, updated to April 20, 2024.

ThresholdMargin RatioAccount Status
Initial depositGreater than or equal to 100%Stock trading
MaintainGreater than 80% but less than 100%Margin shortage but no additional deposit required
Margin requirementsGreater than 60% but less than 80%Required to top up to the initial margin level by morning of the following trading day. Failure to do so will result in a liquidation sale of the asset by early afternoon.
Compulsory foreclosure saleLower than 60%As soon as the account falls into this state, the brokerage firm will sell in the portfolio to return to the initial margin threshold.

Note: Margin Ratio = Net Assets/Initial Margin Requirement

How to Handle Margin Calls for Stock Investors

3. Formula for calculating Call Margin

Each exchange will have its own regulations. call margin ratio different. The maintenance margin ratio can be different for each stock, there are stocks that are assessed as high risk, they set the maintenance margin ratio up to 49 - 56%. When the actual margin level = actual net assets / remaining stock value is lower than the prescribed margin level, the investor will receive a Margin Call notification from the securities company to deposit more money or sell some stocks.

Margin ratio M = Investor's net assets/ Total value of securities

After 2-3 days, if the investor does not adjust the leverage to a safe threshold, the stock will be sold by the securities company to repay the loan.

In fact, the brokerage company will never let the stock price fall too low, you lose all your money and then start calling margin, because that will affect the possibility of them losing part of the margin loan money. They will set a limit called the maintenance margin ratio, usually 30%.

You will receive a notice to deposit money (about 1-2 days) to bring the maintenance margin ratio back to 30% as prescribed, the additional amount to deposit is:

Additional margin = (Margin ratio – Maintenance margin ratio) x Total asset value calculated at market price

If additional money is not deposited within the prescribed time (about 1-2 days) and the stock price drops too quickly, below the force sell margin ratio (usually below 20%), the securities company will immediately perform a force sell to recover the money.

For example: Stock price D drops to 65,000 VND/share, at this time:

  • Margin Ratio M = (130 – 100)/130 = 23% (< 30%).
  • Additional margin amount = (23% – 30%) x 130 = 9.1 million VND.

Margin call time frameMany investors mistakenly call this the margin call time frame. But it is more accurate to call it force sell time frame. Because margin call is just an action to remind you to deposit money into your securities account.

  • When investors are unable to deposit more money to bring the margin lending ratio to a safe threshold, the securities company is likely to lose capital due to the continued decline in stock prices, and will sell off the collateral.
  • The automatic force sell time frame of the securities company system is usually 10:00 - 11:00 in the morning session and 14:00 in the afternoon session.
  • However, in some cases, securities companies also divide different margin call time frames to avoid the market not being able to absorb them in time.
  • The signal to recognize that the market is being force sold is the phenomenon of stocks lying on the floor, sell orders as if dumping goods.

Cross margin callCross Margin Call is a phenomenon where a securities company cannot sell stocks that are losing money due to lack of liquidity. Instead of selling stocks used as collateral for margin loans, the securities company is forced to sell off your other stocks to recover the margin.

  • It is the cross margin call that leads to other good stocks being sold off to recover margin.
  • This case often happens when the market drops too much, stocks hit the floor simultaneously.
  • In 2022, the market often experienced this situation with a series of unexpected events... causing the Vietnamese stock market to plummet. Especially real estate stocks, leading to cross-margin calls of many other stocks.

For example, you mortgage 1,000 DIG shares to buy 1,000 MBB shares. But because DIG continuously hits the floor with no buyers, the securities company is forced to sell MBB to recover the margin loan money.

How to Handle Margin Calls for Stock Investors

4. How to handle margin calls for stock investors

Any investor who is trading on margin with a company to buy and sell securities is at risk of facing a Margin Call. When the margin ratio is lower than the required level, the individual investor will not be allowed to proactively increase the collateral ratio. Therefore, to bring the assets to a safe threshold, it is mandatory to follow the processing requirements of the securities company.

  • Case 1 – Additional deposit: (Y + additional deposit)/ (Z + additional deposit) > M
  • Case 2 – Selling stocks: (Y + quantity of stocks*price)/Z >M

When a stock investor faces a margin call, there are a number of steps that can be taken to resolve the situation:

  • Situation assessment: Investors need to consider the margin ratio and available assets in the account to assess the level of risk and the ability to execute transactions.
  • Contact the securities company: First, investors need to contact the securities company to better understand the causes and specific requirements of margin calls.
  • Comply with securities company requirements: Comply with securities company requirements, including adding cash or collateral to maintain adequate margin.
  • Consider the options: Investors should consider possible options such as selling stocks, adding cash to their accounts, or adjusting their portfolios.
  • Implement risk management: Re-evaluate your investment strategy and risk management in the future to avoid recurrence of margin calls.
  • Learning from experience: Use the experience from this situation to improve future financial management and strategy.

Responding promptly and soberly to margin calls will help investors minimize risks and maintain a stable financial situation in the stock market.

Call Margin is an order that no investor wants to encounter, but if they receive a Call Margin, investors should stay calm to handle it, should not rush and do everything emotionally, which can easily lead to great loss of assets.

Source: Onstocks

Share:

Picture of HVA Group

HVA Group

HVA shares are a sustainable profitable choice in the investment field. Committed to bringing safety and maximum benefits to investors through effective investment solutions.
HVA shares are a sustainable profitable choice in the investment field. Committed to bringing safety and maximum benefits to investors through effective investment solutions.

Related Articles