Andrew buys 1,000 shares of AT&T stock with a margin requirement of 50 percent. At the time of the original transaction, AT&T stock was $24 per share. When AT&T stock then falls to about $12 per share, Andrew will likely receive a(n) ____ from the brokerage firm.
A) margin cancellation
B) short sell
C) margin call
D) increased margin requirement
E) speculative recall

Question

Quizplus · Accepted Answer

A margin call is a demand from a brokerage firm for an investor to add money or securities to their account to bring the account back up to the minimum maintenance margin requirement. Since the stock has fallen in value by half, the value of Andrew's account would now be $12,000, meaning his equity would only be $6,000. However, since the initial margin requirement was set at 50 percent, Andrew should have had $12,000 equity in the account to meet the requirement. Therefore, the brokerage firm will require him to put additional funds into the account to cover the shortfall, which is known as a margin call.

Andrew Buys 1,000 Shares of AT&T Stock with a Margin