I’ve been investing with margin. In my account, I used all the cash to buy stocks. Then, I applied for the bank to extend me margin in my account. As an example, I bought 1000 shares of Artis REIT (AX.UN) with cash. Then, I was able to buy another 3000 shares of Artis REIT (although it could have been any shares with an equal dollar value) on margin, because I only need to provide cash for 30% of the share purchase (of TSX-listed shares over $5.00).
The market has been volatile over the past couple weeks. I bought another stock that cost around $7.00 per share. And to be safe, I didn’t use all my margin. But the problem was that the stock fell in price. When stocks fall, there is less margin available, which could result in a margin call (a requirement to deposit more cash). But worse yet, the shares fell below $5.00, at which point I need to provide 50% of the value in cash (not just 30%).
Suppose I had invested $49,000 in a $7.00 stock by buying 7000 shares. I deposit $15,000 and make the purchase, using $34,000 margin. If the shares fall in price to $6.00, I have $42,000 of stocks, but my $15,000 (that I deposited in cash) is now worth only $12,857. The proportion remains the same, so there’s no margin call, unless I also had other stocks fluctuating. But if the stock falls to $4.00, the “cash” portion is only worth $8,571 and the shares only qualify for 50% margin, so I can only own $17,142. However, I would hold $28,000, so I either need to deposit another $10,858 or sell shares at a loss.
A margin call can either be triggered by shares of a single company losing value within a portfolio, or by share prices descending below $5.00 (on the TSX) and not providing as much marginable value. The same could happen for shares that are de-listed from the TSX and moved to the TSX-Venture.