Glossary

Margin call

When an investor borrows to bet on markets, they put down a deposit known as “margin”.

When investors buy shares or other financial assets, they might borrow money with the aim of boosting their returns. This is known as “leverage” or “gearing”, because using borrowed money amplifies movements in the underlying asset price, making both gains and losses far greater.  

You can view it as being similar to buying property with a mortgage. If you put down a 20% deposit on a £100,000 house, and the price rises by 10%, you’ve made £10,000, or a 50% return on your £20,000 deposit. If instead you had only put down a 10% deposit, you’d have made 100% – doubling your original £10,000. 

When an investor borrows to bet on markets rather than houses, they also put down a deposit. In this case, it’s known as “margin”. “Margin” is there to protect the bank or broker who is lending the money to the investor. If the bet goes the investor’s way, everything is fine. They may even be able to borrow more. But if the bet goes against them, then the cushion provided by the margin shrinks.

A “margin call” happens when the margin available to cover any losses falls below a certain level. At that point, the bank or broker demands the investor puts up more “margin” in the form of cash or other collateral, to cover against potential losses. If they fail to do so, the banks may force the sale of their holdings to reduce their own risk. 

Among private investors, spread-betters often get margin calls, whereby accounts are automatically shut once they fall to a certain level (this is a sign of poor risk management on the spread-better’s behalf). But it also happens to institutional investors, such as hedge funds. The risk is that if a heavily leveraged seller is forced to sell their shares, this can trigger margin calls on others, resulting in a domino effect. This is one reason why the Federal Reserve acted so quickly to underwrite the market during the early phase of the Covid-19 crash in March 2020.

Recommended

Misery index
Glossary

Misery index

The misery index is constructed by adding the unemployment rate to the inflation rate.
10 Sep 2021
Zombie company
Glossary

Zombie company

A zombie company is one that earns enough money to keep running, and to pay the interest on its debts, but not enough to expand, invest or to pay down…
17 Apr 2021
Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021