What is a margin call?
A margin call is triggered when your loan‑to‑value ratio (LVR) rises above the limits set by your lender, whether that’s the margin call threshold or the maximum gearing ratio.
In practice, it’s a request from your lender to restore balance by adding funds or selling assets. This usually happens when the shares you’ve purchased through a margin loan fall in value, reducing your equity share and requiring you to top up to bring the loan back within the agreed ratio.
What is your LVR?
Lenders use your LVR to determine the risk of your margin loan. This is the percentage of your loan in comparison to the value of your investment which can include shares, managed funds or cash to be used as a form of security. In most cases, the larger and more stable the company to be invested in, the higher the LVR than those considered smaller and more volatile.
Read more: What is LVR and why it matters
When can you face a margin call?
If the portion of your financial portfolio used as security drops due to a loss in share price, you may exceed the maximum LVR required for your margin loan. As a result, a margin call is triggered, and you will be required to:
- Reduce your loan amount, or
- Contribute additional security to your portfolio in the form of cash or another asset, or
- Sell part of your investment until your LVR is below the maximum requirement.
Generally, with a margin loan, a lender will place a borrowing limit on you, plus a buffer - usually 5%. For instance, they may have a minimum LVR requirement of 75% and a buffer of 5%.
This means that when the trading price of your investments falls to the point that you owe more than 80% of the value of your security, you'll face a margin call.
Margin call example
Say you own 1,000 shares in a company, originally valued at $10 each. When you took out a margin loan to buy these shares, you provided $2,500 in cash and borrowed $7,500, giving you an LVR of 75%, which is also your lender's maximum.
Upon releasing its quarterly results to close out the year, the company you have invested shares into through your margin loan has not performed as well as expected, with the value of its shares falling to $8.50. Suddenly, you owe $7,500 on shares worth only $8,500, which pushes your LVR to:
That’s well above the 75% limit. To comply, your loan should be no more than:
Since you owe $7,500, you’re short by:
At this point, your lender issues a margin call, requiring you to add $1,125 in cash or sell assets to bring your LVR back within the agreed ratio.
What are your options when faced with a margin call?
To remove the margin call in place by your lender, generally, you have three main options:
- Deposit money into your margin loan account: If you have the funds available, you can transfer money into your loan account so that you meet the value of the margin call.
- Transfer approved securities to cover the value: Sometimes, lenders will let you cover the amount of the margin call by putting up additional security in the form of other shares, managed funds or cash.
- Sell some of your assets: Finally, if you don't have the funds to meet either of the first two options, you may be forced to sell some of your assets. This, however, can have a major impact on your investment and lead to losing a substantial amount of money.
It is important to recognise that all forms of investing bear risks, with marginal lending generally being at the riskier end of the spectrum.
On one side of the coin, borrowing to invest a greater amount of money in shares or managed funds may present the opportunity to increase potential returns, but on the other side a margin loan can also magnify losses.
If you're interested in borrowing to fund your investment portfolio, it's important to take the time to carefully research your investments. Start by comparing margin loans through the comparison table to determine exactly how much you have to invest.
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
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First published in January 2023
