5.18What happens when margin requirements are not met?
1What is it?
If you don’t meet a margin call in time, the broker sells your shares (liquidates) to recover the loan, at whatever the market price is.
2Why does it exist?
This often happens at the worst possible time: after a big fall. You can lose more than you expected.
3Risks
- Forced selling at low prices.
- In extreme gaps you can owe the broker money (a debit balance).
- Penalties for margin shortfall.
4Quick revision
- Unmet margin → forced liquidation.
- Often at the worst prices.
- You can end up owing money.
5Knowledge check
Q1. Who decides when to sell in forced liquidation?Show answer
The broker.
Q2. Can you lose more than your margin?Show answer
Yes, in large falls or gaps you can owe the broker.
Q3. What is a debit balance?Show answer
Money you owe the broker.