What Is the Difference Between Fed Call & Margin Call?
Margin trading is where an investor doesn't pay the full cash price when buying stocks. Instead the investor pays some of the money, but borrows the rest from a stockbroker. If things go well, the investor pays back the borrowed money and walks away with a profit, which will be bigger because he bought a larger quantity of stock thanks to the borrowing. If things go badly, the investor could not only lose his own money, but may also have to come up with extra cash to repay some or all of the borrowed money.
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Margin Concept
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There are three main figures in play at any stage of leverage trading: the amount of cash the investor has deposited with the stockbroker in what's known as a margin account; the amount of money the investor owes the stockbroker; and the current value of the stock. The ratios between these three figures will vary as the stock value changes. As both federal regulations and stockbroker policies require these margins to be at particular levels, investors may be required to pay extra cash to the stockbroker if a stock price fall brings the margin too low.
Fed Call
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A fed call, also known as a Regulation T call, is triggered by a federal regulation. The regulation states that at the point a person makes a purchase on leverage, she must have 50 percent equity. This means the combination of the money the investor has paid into her leverage account and the current value of the stocks owned through the account must be at least half the total money owed to the stockbroker. If this isn't the case, she pay the broker enough to make up the difference. The fed call is the formal request for this payment.
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Maintenance Call
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A maintenance call, often simply known as a margin call, can be triggered at any time. It happens when the investor's equity falls below a particular margin set by the stockbroker, often between 30 and 40 percent. The investor will again have to pay enough cash to bring the equity back up above the required level. While a fed call can only happen at the time of a stock purchase, a maintenance call can happen at any time. If a stock price slumps, an investor might have to answer numerous maintenance calls.
Consequences
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Failing to answer a fed call will usually lead to a suspension or permanent removal of the ability to trade on leverage.
With a maintenance call, the investor has the option to sell some of the stock rather than pay cash, to bring the equity back to the required proportion. If the investor fails to answer the call, the broker has the right to sell the stock without the investor's permission.
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