Lower margin accounts fall below the minimum maintenance requirements set by the brokerage firm, resulting in a margin call to bring the account back to standards. The brokerage may allow a grace period, but restrictions may be placed on investment activity during this time.
Lower margin accounts are investor accounts that have fallen below the minimum standard of maintenance requirements established by the brokerage firm. When a client’s account falls to a level that is below the minimum maintenance requirements, it is not unusual for the broker to issue a margin call to the client. The amount of the margin call will be at least enough to bring the undermarginized account back to those standards, and is often a few percent above that minimum requirement.
When thinking in terms of a margin call being used to bring an undermarginized account back to standards, it can be helpful to think of the call as debt that is now due. By acknowledging the call and paying the call amount to the broker, the investor’s account is credited with the amount and the undermarginized account is brought back into alignment with the requirements outlined in the broker-investor agreement.
Depending on the details of the working relationship between the broker and the investor, the brokerage may choose to allow a lower margin account to operate for a short period of time. This is particularly true for the investor and the broker has a long-standing business relationship. However, it should be understood that it is a courtesy that the broker may choose to extend. Providing a grace period for the investor to realign the undermarginized account without the issuance of a margin call is not something the broker is required to offer.
During the period that the brokerage deems the account to be undervalued, the investor is often limited in the type of orders they can execute in connection with the investment activity that is typically done through the broker. Generally, any limitations are discussed with the client at the time the lower margin account is recognized as falling below the margin requirements. The broker may choose to waive a restriction if the order will allow the client to cover the margin call and bring the trading account back to standards.
Smart Asset.
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