What is a Maintenance Call [Securities]? A Comprehensive Guide
Definition & meaning
A maintenance call, in the context of securities, is a request from a broker to a client to provide additional funds or collateral, such as stocks, when the value of the client's securities falls below a certain level. This situation typically arises when the market prices of the securities decline, prompting the broker to ensure that sufficient collateral is maintained to cover the financed purchase. A maintenance call is also commonly referred to as a margin call.
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Maintenance calls are primarily used in the financial and securities sectors. They are relevant in transactions involving margin accounts, where clients borrow funds from brokers to purchase securities. When the value of these securities decreases, brokers may issue a maintenance call to protect their interests. This concept is important for individuals and businesses involved in investment activities, as it can impact their financial obligations and investment strategies.
Key Legal Elements
Real-World Examples
Here are a couple of examples of abatement:
Example 1: A client has a margin account with a broker and has purchased $10,000 worth of stocks using borrowed funds. If the value of those stocks drops to $7,000, the broker may issue a maintenance call requiring the client to deposit additional funds or securities to maintain the required collateral level.
Example 2: A trader holds a portfolio of securities worth $50,000 but has borrowed $30,000 against it. If the market value of the portfolio falls to $40,000, the broker may issue a maintenance call to ensure that the loan is adequately secured. (hypothetical example)
Comparison with Related Terms
Term
Definition
Maintenance Call
A request for additional collateral due to a decline in the value of securities.
Margin Call
Similar to a maintenance call; specifically refers to the demand for additional funds in a margin account.
Collateral Call
A general term for any request for additional collateral, which can occur in various types of financial agreements.
Common Misunderstandings
What to Do If This Term Applies to You
If you receive a maintenance call, it is important to respond promptly. You can either deposit additional funds or securities to meet the broker's requirements or consider liquidating some of your holdings to cover the margin. If you're unsure how to proceed, you may want to consult a financial advisor or explore US Legal Forms for templates that can help you manage your financial agreements effectively.
Quick Facts
Typical fees: Varies by broker
Jurisdiction: Governed by federal and state securities laws
Possible penalties: Liquidation of securities if the call is not met
Key Takeaways
FAQs
A maintenance call is triggered when the market value of the securities in a margin account falls below the broker's required level of collateral.
To avoid a maintenance call, maintain a higher level of equity in your margin account and monitor the market closely.
If you ignore a maintenance call, the broker may liquidate some or all of your securities to cover the margin requirement.
