margin is now   Margin   Equity in account Value of stock   $3,000 $7,000   .43, or 43%   If the stock value were to fall below $4,000, equity would become negative, meaning that the value of the stock is no longer sufficient collateral to cover the loan from the bro- ker. To guard against this possibility, the broker sets a maintenance margin. If the percent- age margin falls below the maintenance level, the broker will issue a margin call requiring the investor to add new cash or securities to the margin account. If the investor does not act, the broker may sell the securities from the account to pay off enough of the loan to restore the percentage margin to an acceptable level. Margin calls can occur with little warning. For example, on April 14, 2000, when the Nasdaq index fell by a record 355 points, or 9.7%, the accounts of many investors who had I. Introduction 3. How Securities Are Traded The McGraw−Hill Companies, 2001           CHAPTER 3 How Securities Are Traded 89     purchased stock with borrowed funds ran afoul of their maintenance margin requirements. Some brokerage houses, concerned about the incredible volatility in the market and the possibility that stock prices would fall below the point that remaining shares could cover the amount of the loan, gave their customers only a few hours or less to meet a margin call rather than the more typical notice of a few days. If customers could not come up with the cash, or were not at a phone to receive the notification of the margin call until later in the day, their accounts were sold out. In other cases, brokerage houses sold out accounts with- out notifying their customers. An example will show how the maintenance margin works. Suppose the maintenance margin is 30%. How far could the stock price fall before the investor would get a margin call? To answer this question requires some algebra. Let P be the price of the stock. The value of the investors 100 shares is then