How Margin Calls Work
A margin call occurs when losses on leveraged positions reduce your account equity below the maintenance margin requirement, typically 25-30% of the position value. If you buy $300,000 in stocks with $100,000 of your own money and the position drops 20% to $240,000, your equity falls to $40,000, a maintenance margin of just 17%. The broker demands you deposit additional funds immediately.
What Happens Next
You typically have until the next business day to deposit funds or reduce positions. Failure to meet the call triggers forced liquidation at whatever price the market offers, often at the worst possible moment. Forced selling during a market panic locks in losses and eliminates any chance of recovery. The broker's priority is protecting their loan, not your investment outcome.
Prevention
Keep leverage conservative: even though brokers allow 3-4x leverage, limiting yourself to 1.5-2x provides substantial buffer. Set stop-loss orders to exit positions before margin calls trigger. The simplest rule: never take a position where a margin call is possible. If you cannot afford to lose the full amount without borrowing, the position is too large.