Margin Call
Definition:
A margin call is a notification from a brokerage firm to a client requesting additional funds to cover a margin loan. Margin loans are loans that investors borrow money from their brokerage firm to purchase securities.
Purpose:
- To maintain the required margin ratio: Margin requirements are typically 50% for most securities. If the value of the client’s securities falls below the required margin ratio, the brokerage firm may require the client to deposit additional funds to maintain their account.
- To protect the firm’s interests: If a client fails to meet a margin call, the brokerage firm may liquidate the client’s securities to cover its losses.
- To ensure orderly market conditions: Margin calls help to prevent panic selling and market instability caused by margin calls.
Types of Margin Calls:
- Full margin call: Requires the client to provide a full margin, typically 100% of the investment cost.
- Partial margin call: Requires the client to provide a partial margin, usually a specified percentage of the investment cost.
- Cash call: Requires the client to provide cash to cover the margin shortfall.
- Stock call: Requires the client to provide additional securities to cover the margin shortfall.
Impact of Margin Calls:
- Limited liquidity: Margin calls can limit the liquidity of an investor’s portfolio, as the investor may not be able to sell securities to raise funds to meet the call.
- Higher borrowing costs: Margin calls can result in higher borrowing costs for the investor, as the brokerage firm may charge additional fees or interest on the loan.
- Stress and anxiety: Margin calls can be stressful for investors, as they may worry about losing their investment or being unable to meet the call.
Example:
If an investor has a margin loan of $10,000 and the value of their securities falls to $8,000, the brokerage firm may require the investor to deposit an additional $2,000 to maintain their margin ratio. If the investor fails to meet the call, the firm may liquidate some of the investor’s securities to cover its losses.
FAQs
Is Margin Call based on a true story?
While Margin Call is not directly based on a specific firm or event, it is inspired by the events of the 2008 Global Financial Crisis (GFC). The filmโs storyline and characters are fictional, but the plot reflects the financial turmoil and decisions that led to the crisis.
What is the main problem or dilemma in Margin Call?
The main problem in Margin Call is the discovery of severe over-leveraging in a major investment firmโs mortgage-backed securities, which could lead to catastrophic losses. The firm faces a moral and financial dilemma: sell off toxic assets quickly to save itself or risk collapse.
Why is Margin Call so popular?
Margin Call is popular for its realistic portrayal of the financial industry, intense dialogue, and ethical conflicts. It captures the tense decision-making that occurs during financial crises, making it relatable and educational for viewers interested in finance.
Is Margin Call worth watching?
Yes, Margin Call is highly regarded as a thought-provoking financial thriller with a strong cast and insightful look into the 2008 financial crisis. Itโs especially recommended for those interested in finance, ethics, and corporate decision-making.
