₦airaland Forum

Example of a Liquidation Margin
Sarah is a margin trader who invested $10,000 in a single stock using 100% leverage. Assuming Sarah paid the required margin interest or the loan rate between broker and investor and used a 2:1 leverage. The stock increased in value, and she holds $20,000 worth of stock. Since the initial liquidation margin is only $10,000, $10,000 is what Sarah would receive if the account were closed.

Suppose that Sarah's stock performed poorly and fell 25%. Since Sarah was initially using 2:1 leverage, that means she lost 50% of her original investment. Sarah's account now has a liquidation margin of just $5,000, but she commands $15,000 worth of stock.

When the equity in a margin account falls below the brokerage requirements, most firms will issue a margin call. When this happens, action is required to increase the equity in an account by depositing cash or by selling securities. However, selling a position the following business day would create a margin liquidation violation.

A margin liquidation violation occurs when a margin account has been issued both a Federal Reserve and an exchange call and you delay selling securities instead of depositing cash to cover the calls.