Margin Calls, explained.
A margin call reflects a breach of required equity relative to assets in a borrowing-supported account. Asset prices can fall while debt remains, magnifying losses on the owner's equity.
Why it happens
Equity equals assets minus debt. A loss on all gross assets is borne by the smaller equity base. A maintenance breach may require extra capital or debt reduction; a forced sale can alter the remaining exposure even when it leaves equity unchanged immediately.
A margin call occurs when account equity is insufficient for a required maintenance level. Borrowing magnifies the effect of asset-price changes on equity and may force liquidation.
Read the result
Open an account and reveal each market move. A breach blocks the next move until you deposit outside cash or sell assets to repay debt. Read Net gain after contributions so an injection is not mistaken for an investment gain.
A worked example
Three-times leverage during a price decline
With 100 equity and 3× gross leverage, assets are 300 and debt is 200.
A 20% asset decline leaves assets of 240 and equity of 40: a 60% loss on the original equity.
Equity/assets is about 16.67%, below this game's 30% requirement. Adding cash or reducing debt changes the ratio; the account loss has not disappeared.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Start with equity 100, gross assets equal to 100×leverage, and debt equal to assets−100. Four disclosed teaching shocks apply to assets. Maintenance requires equity/assets≥30%. Deposit adds outside cash to assets; the alternative sells assets and repays debt to reach the threshold when equity is positive. Outside deposits are tracked separately from profit.
Where this idea is useful
A practical use
With 3× leverage, a 20% asset loss changes equity from 100 to 40, a 60% equity loss before interest.
A common misconception
“The maximum loss is always the original equity.”
Borrowing can leave debt above the remaining assets. Real accounts can owe more than their initial equity, and liquidation does not automatically erase that obligation.
What this explanation leaves out
- The 30% threshold is a stipulated teaching rule, not a broker's promise. Real brokers may liquidate without advance notice, change requirements, and charge interest. Debt can exceed assets; loss can exceed initial equity.
Why does the cash deposit exceed the apparent equity shortfall?
A cash deposit increases both equity and account assets. The required amount solves (equity+deposit)/(assets+deposit)=maintenance, rather than treating the asset denominator as fixed.
Which obligation would remain unchanged if the asset supporting it suddenly lost value?
Further reading
Explore the original research or the teaching reference behind this experiment.