Maintenance requirement and the margin call price

After you buy, your equity must stay at 25%

You bought stock on margin, and now the price is falling. How far can it fall before the firm steps in? The maintenance requirement is the least equity you must keep after you buy. For stock you own, FINRA sets it at 25% of market value.

Quick reminder. Equity is market value, what the stock is worth today, minus the debit, what you owe. Say Maya bought 300 shares at $60, or $18,000. She put down half, so she owes $9,000. That debit stays put.

The price falls to $50, so her stock is worth $15,000. Her equity is $6,000. The minimum is 25% of $15,000, or $3,750. She's above the minimum, so nothing happens yet.

A firm can ask for more, like 30%. That's a house requirement, and the stricter number applies. The mistake on the exam is using 50% here. Fifty percent is Reg T, for the day you buy. Twenty-five percent is maintenance, for every day after.

Remember: after you buy, your equity must stay at least 25% of today's market value, not what you paid.

A margin call asks you to fill the gap

What happens when your equity falls below the 25% maintenance line? Equity is the part of the account that's yours. You get a margin call, also called a maintenance call. A margin call is the firm asking you to add money, so your equity gets back to 25%.

You can meet it with cash or with fully paid securities. If you don't, the firm can sell your stock to cover the loan. Say Maya owes $9,000, and her stock falls to $10,800. Her equity is $10,800 minus $9,000, which is $1,800.

She needs 25% of $10,800. That's $2,700 of equity. She needs $2,700 and has $1,800. The gap is $900, so the margin call is for $900.

The mistake on the exam is calling for the whole $2,700. She already has $1,800 in there. She only adds the gap. Remember: a margin call asks you to fill the gap. It's the equity you need, minus the equity you have.

The call price: divide the debit by 0.75

How far can your stock fall before you get a margin call? A margin call is the firm asking you to add money. The call point is the market value where your equity is exactly 25%. Market value is equity plus debit. So at that point, the debit is the other 75%.

If the debit is 75% of market value, then market value is the debit divided by 0.75. Say Maya owes $9,000 on 300 shares. $9,000 divided by 0.75 is $12,000. Spread over 300 shares, that's $40 a share.

Check it. At $12,000, her equity is $3,000. That's exactly 25%. If the stock drops below $40, she gets a call. If the firm uses a 30% house rule, the debit is 70% at the call point. Then you divide by 0.70 instead.

The mistake on the exam is multiplying the debit by 1.25. That gives $11,250, and equity there is already under 25%. Remember: the call value is the debit divided by 0.75, because at the call, the debit is 75% of market value.

Worked example: Find the margin call price per share

1. A customer buys 800 shares at $30 on margin and deposits 50%. Maintenance is 25%. Below what price do they get a margin call?
2. Step one: find the debit, because the call price depends on the loan. The purchase is $24,000. Half is deposited, so the debit is $12,000.
3. Step two: divide the debit by 0.75, because at the call the debit is 75% of market value. That gives $16,000.
4. Step three: the question asks for a price, so divide by 800 shares. That's $20 a share.
5. Check it. At $20, equity is $16,000 minus $12,000, which is $4,000. That's exactly 25%. Below $20, the account gets a margin call.

Common mistakes

Divide the debit by 0.75, not multiply by 1.25

You multiplied the debit by 1.25. It's close, but it's wrong. At the call point, equity is 25%, so the debit is 75% of market value. So divide the debit by 0.75. A $12,000 debit gives $16,000, not $15,000.