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Margin Calls.

Borrow to buy, survive a price shock, and decide how to repair the account.

Interactive experimentintuitiveField note ·
Preparing the experiment…
THE SHORT VERSION

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.

01 / THE MECHANISM

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.

02 / FOLLOW IT THROUGH

A worked example

Three-times leverage during a price decline

  1. With 100 equity and 3× gross leverage, assets are 300 and debt is 200.

  2. A 20% asset decline leaves assets of 240 and equity of 40: a 60% loss on the original equity.

  3. 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.

03 / BEYOND THE EXPERIMENT

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.

CHECK YOUR INTUITION

A common misconception

THE TEMPTING CONCLUSION

“The maximum loss is always the original equity.”

THE MORE USEFUL DISTINCTION

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.
ONE MORE QUESTION

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.

TAKE THE IDEA WITH YOU

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.