Liquidation Margin

A lot of times, people use their own money to invest in securities. But in some instances, we can borrow money from our brokerage firm and buy securities with that instead. When we do this, that account is known as a “margin account.”

Margin accounts allow us to invest with borrowed money, and all we have to do is pay interest on what we borrow. This is great if we end up making money, but it can be bad news bears if we don’t. Because if we lose the firm’s money, then not only do we have to pay them back for the losses, but we’ve also got those pesky interest payments to worry about.

Anyway, when we have a margin account, the value of the equity positions held in it is referred to as our “liquidation margin.” In other words, if we’re holding short positions (sell now, buy later), then our liquidation margin refers to what we’ll owe when we buy. And if we’re holding long positions (buy now, sell later), then our liquidation margin is what we’ll have after the sale. If our liquidation margin is less than our margin call, our broker might go ahead and liquidate all or part of our account to make up for the discrepancy.