What is a margin call?

What is a margin call?

• A. When an investor earns profit on margin trading
• B. The demand for additional cash or securities due to price declines
• C. A request from the investor to withdraw cash
• D. When a dealer member offers a lower margin requirement

Answer: (B)

A margin call refers to the requirement that an investor must meet when the value of their margin account falls below the broker's required minimum value. This happens because the securities owned in the margin account have dropped in price, resulting in a situation where the equity in the account is no longer sufficient to cover the broker's risk.

When a margin call is issued, the broker will demand additional cash or securities to ensure that the account remains above the required level. This process helps protect the broker against losses in the event of further declines in the value of the securities. In essence, it is a safety measure to maintain the loaned funds that the investor used to purchase investments on margin.

This understanding underscores the importance of maintaining enough equity in a margin account, as failing to respond to a margin call could result in the broker liquidating some or all of the securities in the account to cover the debt. The other options do not encapsulate the true nature of a margin call; instead, they refer to different aspects of trading or investing that do not pertain directly to the mechanics of margin accounts and the obligations of an investor when account values change.