- In This Section
- How Margin Trading Works
- 7 Benefits of Margin Loans
- Primary Margin Risks
- 4 Tips for Managing Margin Risk
- How To Open a Margin Account
- Maintaining a Margin Account
- Margin Requirements
- 3 Strategies for Using Margin
- Day Trade Buying Power
- Regulation T FAQ
- Concentrated Accounts
- Margin Calls
- Margin Requirements for Leveraged ETFs
A margin call is a demand that an investor using margin deposit additional money or stock so the margin account is brought up to the minimum maintenance requirement. There are two main types of margin calls at Scottrade: Maintenance Calls and Fed Calls.
What You'll See: "The equity in your account has fallen below the minimum maintenance requirement. An immediate deposit of funds and/or the deposit of marginable securities are needed to satisfy this call."
What it Means: Per NYSE Rule 431 and FINRA Rule 4210, Scottrade will be required to liquidate positions if equity requirements are not met. Any accounts dropping below the minimum equity level require immediate action, meaning Scottrade could be required to liquidate some or all of the assets you hold with us in less than 24 hours to meet the call. Any positions liquidated will be at the discretion of Scottrade. Generally, drops in equity percentage are the result of market depreciation of held assets or opening transactions made in the account.
How a Maintenance Call Can Occur:
Let's say you deposit $5,000 into a new margin account. Your equity in the account would be $5,000, but you would have buying power of $10,000.
If you spent all $10,000 on 100 shares of XYZ @ $100/share, you would still have $5,000 equity invested in XYZ and Scottrade would be lending you $5,000.
Let's say XYZ dropped to $80/share. Your account value would decline to $8,000. You would still owe Scottrade $5,000 – leaving you with $3,000 equity.
With an Account Value of $8,000 you would be required to maintain an equity level of $2,400 (8,000 x .3 *30% maintenance requirement).
Since your equity is above the minimum maintenance requirement $3,000 > $2,400 you are not in a maintenance call situation.
Now let's say that XYZ drops to $70/share. Your account value would decline to $7,000. You would still owe Scottrade $5,000 – leaving you with $2,000 equity.
With an Account Value of $7,000 you would be required to maintain an equity level of $2,100. (7,000 x .3 (30% maintenance requirement).
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Potential Consequences: If the call is for more than $100, you will receive a notification from Scottrade alerting you to the call and reminding you to meet the call immediately. You will have two business days to meet the call. If you do not meet the call in that time, Scottrade has the right to sell off stock from your account to the extent that the call will be covered.
What You Can Do: There are three ways you can meet a maintenance call:
1. Sell stock - To determine how much stock to sell in order to meet the call, you need to consider the value and the maintenance requirement of the stock you're selling. The amount of proceeds that go to meet the call is calculated as the value of stock sold multiplied by the maintenance requirement. For example, to meet a maintenance call of $600, you could sell 400 shares of stock valued at $5 per share ($2,000 of stock x 30%maintenance requirement = $600).
2. Deposit stock - To meet a maintenance call with deposited stock, the stock you deposit must be fully paid for. To determine how much stock to deposit, take the amount of the call and divide it by the loan value of the stock (loan value = 100% - maintenance requirement % of that stock). For example, to meet the same $600 call noted above at the Scottrade's 30% house requirement, you can find out how much stock you need to deposit using the equation: ($600 / loan value = $600 / 70% = $858). Therefore, you would need to deposit $858 of marginable stock to cover the $600 call.
3. Deposit funds - You must deposit the exact amount required by the call. Scottrade accepts wired funds, cashier's checks and money orders in response to a maintenance call.
Please click here for instructions on wiring funds into your account. Your bank may not provide notice or complete the transfer of funds prior to Scottrade selling your positions. It is therefore your responsibility to notify the branch with the federal wire reference number.
Please be aware that per the margin agreement, Scottrade reserves the right to institute immediate discretionary liquidation without prior notice and without giving you the opportunity to deposit additional equity in order to satisfy your equity requirements. You will be responsible for any resulting debit balance left in your account.
If you have any questions, please contact your local branch office.
What You'll See: "An initial call has been generated for the order(s) recently executed in your account. In order to satisfy Federal Reserve Regulations, it is necessary for you to immediately deposit additional funds into your account."
What it Means: This is an initial request for additional funds after you make a purchase. The federal requirement for purchasing stock is 50% equity. A fed call is generated when a new purchase or short sale is made on margin and your account equity drops below the federal reserve requirement. Unlike maintenance calls, fed calls can only be the result of an opening transaction.
Potential Consequences: Fed calls must be met immediately. If the call is not met, Scottrade has the right to sell off stock from your account to the extent that the call will be covered.
Unlike a maintenance call, a fed call should not be met by selling stock. This can result in a liquidation violation, whether you sell the stock or Scottrade sells your securities to meet the call. Liquidation violations result in graduated penalties:
1st Violation - Your account is marked Restriction 1 (warning) for one year. Trading activity is not affected. However, if your account was below the NYSE minimum of 25% equity at the time, this will be treated as a second violation.
2nd Violation - Your account is marked Restriction 2 (day trading buying power is removed) for 90 days.
3rd Violation - Your account is marked Restriction 3 (day trading buying power is removed) for one year.
4th Violation - Margin is removed permanently from your account.
What You Can Do: A fed call must be met by cash or by depositing marginable stocks.
1. Deposit funds - You must deposit the exact amount required by the call. Scottrade accepts wired funds, cashier's checks and money orders in response to a fed call.* Deposited funds must remain in the account for a minimum of 24 hours to prevent a liquidation violation. *(Scottrade will accept any type of deposit to cover fed calls including personal check, Money Direct®, wired funds, cashier's check or money orders.)
2. Deposit marginable stock - You must deposit two times the amount of stock that is required to meet the fed call. To determine how much stock to deposit, take the amount of the call and divide it 50%. For example, to meet a $500 fed call, you could deposit 200 shares of stock valued at $5 per share ($500 / loan value = $500 / 50% = $1,000). The deposited stock must remain in your account for a minimum of 24 hours to prevent a liquidation violation.
If you have any questions, please contact your local branch office.
Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Scottrade's margin agreement, available at scottrade.com or through a Scottrade branch office, contains the Margin Disclosure Statement and information on our lending policies, interest charges and the risks associated with margin accounts.