Sellouts to Satisfy Margin Calls

Margin accounts allow investors to make leveraged trades, effectively amplifying the profit potential of a position. When taking long positions on margin, the investor or trader effectively borrows money from their broker and then uses that loan to purchase additional shares. When taking a short position, the shares themselves are borrowed from the broker and are sold short. The short seller then hopes to repurchase those shares in the future at a lower price, returning those shares to the broker and profiting from the difference.

To manage the risks associated with such loaned money, brokers carefully monitor the market value and collateral level of their clients’ margin accounts. If the level of collateral dips below their minimum threshold (known as the maintenance margin), the broker issues a margin call to the investor notifying them that if they do not post additional collateral to their account, the broker will forcefully liquidate their portfolio to generate the cash needed to satisfy the outstanding loan balance. This amount is set by regulation at a minimum of 25% of the account’s value, although a brokerage may require a higher amount.

If this liquidation occurs, then the resulting transactions would be a type of sellout, since they are being executed in a forced manner.