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LSDefine
Simple English definitions for legal terms
margin deficiency
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A quick definition of margin deficiency:
Margin deficiency refers to a situation in which the amount of money required to be held in a margin account is greater than the amount of money actually available in the account. This means that the investor does not have enough money to cover their losses, and may be required to deposit more funds or sell securities to meet the margin call.
A more thorough explanation:
Definition: Margin deficiency refers to the situation where the required margin for a security exceeds the equity in a margin account.
Example: Let's say you have a margin account with $10,000 equity and you want to buy $20,000 worth of stock. The broker requires a 50% margin, which means you need to have $10,000 in cash or securities in your account. However, if the stock price drops and the value of your stock falls to $15,000, your equity in the account will be $5,000. This means you have a margin deficiency of $5,000, which is the difference between the required margin of $10,000 and your equity of $5,000.
Another example could be if you have a margin account with $5,000 equity and you want to buy $10,000 worth of stock. The broker requires a 50% margin, which means you need to have $5,000 in cash or securities in your account. However, if the stock price drops and the value of your stock falls to $7,500, your equity in the account will be $2,500. This means you have a margin deficiency of $2,500, which is the difference between the required margin of $5,000 and your equity of $2,500.
These examples illustrate how margin deficiency can occur when the value of the securities in a margin account falls below the required margin. This can lead to a margin call, where the broker requires the investor to deposit more cash or securities to cover the margin deficiency.