Editor’s note: This is general educational information about how margin lending and forced liquidation work in listed equity markets. It is not investment advice, and it describes rules and figures only as they are set out in the official sources listed at the end.
A margin account is a brokerage account that carries a loan agreement inside it. The investor puts up cash, the broker lends the rest, and the shares bought with the combined sum sit in the account as collateral for the loan. That last clause is the one that matters when prices fall, because it is what allows a broker to sell a position without asking. The US Securities and Exchange Commission puts the point bluntly in its investor publication on margin: some investors have been shocked to find that the firm can sell securities bought on margin without any notification.
The Loan, the Collateral and the Interest Clock
The size of the loan is capped at the moment of purchase. Under Regulation T of the Federal Reserve Board, an investor may borrow up to 50 percent of the purchase price of securities that can be bought on margin, a figure the SEC calls the initial margin. Firms may demand more than that, and not every security can be bought on margin at all. Before any of this begins, FINRA requires a deposit of $2,000 or 100 percent of the purchase price, whichever is less, and some firms set the entry bar higher.
The arithmetic of leverage is symmetrical and unforgiving. The SEC works the example both ways. Buy a stock at $50 and watch it rise to $75, and a fully paid position returns 50 percent while a position half funded by a $25 loan returns 100 percent on the cash committed, before the interest owed. Let the same stock fall to $25 instead, and the fully paid holder is down 50 percent while the margined holder has lost 100 percent of the cash committed and still owes interest on the loan.
That interest runs whether or not the position moves. The margin agreement, which the broker must obtain a signature on before the account opens, sets out how interest is calculated, how the loan is repaid, and how the purchased securities serve as collateral. It also sets out what notice, if any, the firm owes the customer before selling those securities. Reading that clause is the difference between understanding the account and being surprised by it.
Where the Maintenance Line Sits
After the trade settles, the binding constraint is no longer the initial 50 percent. It is a second and lower figure, the maintenance requirement, measured against the current market value of the position rather than its purchase price. FINRA Rule 4210 sets the floor at 25 percent of the current market value of all margin securities held long in an account. Short positions carry a heavier charge, $5.00 per share or 30 percent of current market value, whichever is greater, for stock selling at $5.00 per share or above. The SEC notes that many firms impose house requirements above the regulatory floor, typically between 30 to 40 percent, and higher for some categories of stock.
Equity in the account is the market value of the holdings minus the amount owed to the firm. Because the loan is a fixed number and the collateral is not, equity falls faster in percentage terms than the stock does. The SEC illustrates the squeeze with a position of $16,000 in securities funded by $8,000 borrowed and $8,000 of the customer’s own money. If the market value drops to $12,000, equity falls to $4,000. Against a 25 percent maintenance requirement, the account needs $3,000 in equity and is still compliant. Against a house requirement of 40 percent, it needs $4,800, is $800 short, and the firm may issue a margin call.
Nothing in that sequence involves judgment about the company, the sector or the reason for the decline. The trigger is a ratio, recomputed continuously against whatever price the market last printed.
What a Call Actually Obliges
When equity falls below the firm’s requirement, the firm generally asks for more cash or securities. If the customer cannot meet the call, the firm will sell securities to bring equity back up to or above its requirement. Two features of that process are routinely misunderstood. The first is that the broker may not be required to make a call at all, and may sell at any time without consulting the customer first. The second is that even where a firm offers time to top up an account, most margin agreements let it sell without waiting for the deposit to arrive.
FINRA Rule 4210 also blocks the workaround of treating liquidation as a funding strategy. Where a margin call as defined in Regulation T is required, a member may not permit a customer to make a practice of deferring the deposit beyond ordinary settlement or of meeting the call by liquidating the same or other commitments in the account. Cash or securities may be withdrawn from an account carrying a debit balance only if equity afterwards is at least the greater of $2,000 or the amount needed to satisfy the maintenance requirement.
How Korea Polices Leverage in Listed Products
Korean regulators have spent 2026 tightening a different route to the same exposure. Single-stock leveraged exchange-traded funds and notes began listing in the domestic market on May 27, and after market capitalisation and turnover in those products rose sharply on expectations for global memory chip shares, the Financial Services Commission announced a package of measures at a joint market situation review meeting on July 16. New listings of single-stock leveraged, inverse and covered call products were suspended, and advertising and marketing of the listed ones was prohibited with immediate effect.
The rest of the package works through deposits and training rather than maintenance ratios. Retail investors already had to deposit at least KRW10 million to make a new investment in these products. The FSC raised that to KRW30 million and removed substitute securities from the calculation, so that the previous practice of counting 70 percent of the market value of stocks, non-leveraged ETFs and bonds toward the threshold no longer applies and the full amount must be held in cash. The prior learning requirement rose from two hours to three, with a pass mark of 60 percent on each chapter. On July 24 the FSC moved the strengthened deposit rule forward to July 31, and on August 12 it approved a revision to the KRX KOSPI market regulations tightening the premium and discount management duty of securities firms from 3 percent to 2 percent on domestically listed products, with the cash-only deposit rule and a mandatory mock trading session taking effect from August 19.
Analysis: What the Ratio Governs and What It Ignores
Both regimes are doing the same job at different points in the transaction. The maintenance requirement is a solvency test applied continuously after the fact, and the Korean deposit rule is a suitability test applied once, before the position exists. The first protects the lender’s collateral, which is why it can be enforced by sale without consent. The second protects the buyer from a product whose losses are not funded by a broker at all.
That distinction explains a common complaint about forced sales. A margin call is not a warning about the investment, because the firm is not assessing the investment. It is a statement that the collateral backing a loan has fallen below the level the lender is willing to carry, and the remedy prescribed by the rulebook is to restore the ratio, not to wait for a recovery. The rules are written to protect the firm’s balance sheet, and the customer’s interest in timing is not part of the calculation.
Two numbers therefore deserve more attention than they usually get before an account is opened. One is the firm’s house maintenance requirement rather than the 25 percent regulatory floor, since the SEC’s own worked example flips from compliant to short of the line purely on that difference. The other is the notice provision in the signed margin agreement, which is where the answer to whether a position can be sold without a phone call is actually written. Neither number moves with the market, and both are knowable in advance.
A careful reader watching Korea specifically would look next at whether the FSC’s deposit-based approach holds demand down once the November change raising the minimum trading lot for domestically listed single-stock leveraged products from one share to 20 shares takes effect, and at whether the tightened premium and discount duty keeps those products trading closer to the value of what they track.
