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Margin Call

Discussion in 'Investing Glossary' started by Glossary, 27th Sep, 2006.

  1. Glossary

    Glossary Active Member

    12th Sep, 2006

    A margin call is triggered when the ratio of margin loan amount to the value of the assets which secure that loan exceeds the permitted loan to value ratio (LVR) plus the permitted buffer.

    The permitted LVR will depend upon the particular shares and managed funds which comprise the security. For example, most margin lenders will permit a LVR of up to 70-75% against large blue chip shares eg BHP, NAB or Woolworths, but may permit only 40% against smaller, less liquid or more speculative stocks.

    When a margin call is made the margin lender will require the borrower to lodge additional security, either in the form of shares/units or cash to bring the LVR back below the permitted threshold. If the borrower fails to do so within the permitted timeframe, the margin lender's security permits them to sell some of the secured assets to reduce the loan. Generally, that will be a particularly poor time to be realising those assets as a decline in their value is the very trigger for the margin call in the first place.

    See also:

    InvestEd Resources:
    • Article: How Margin Loans Work
    • Toolkit: Market Drop Before Margin Call