Canadian Securities Course (CSC) Level 1 Practice Exam

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What is a margin call?

Request for dividend payment
Notice to deposit cash to cover losses
Demand for additional loan
Call for stock redemption

The correct answer is: Notice to deposit cash to cover losses

A margin call occurs when a broker demands that an investor deposit additional cash or securities into their margin account to bring it up to the required minimum equity level. This usually happens when the market value of the securities in the account decreases, causing the equity percentage to drop below the maintenance margin requirement. When the value of the securities falls, the investor's collateral is no longer sufficient to cover the borrowed funds. In this context, the notice to deposit cash serves as a protective measure for the broker, ensuring that the investor maintains adequate collateral for the loan used to purchase the securities on margin. Thus, option B accurately describes the nature of a margin call, making it the correct answer. The other options, while relevant to different contexts in finance, do not pertain to the concept of a margin call. A request for dividend payment relates to earnings distributions to shareholders, a demand for an additional loan doesn't specifically address margin account requirements, and a call for stock redemption concerns the process where an issuer can repurchase its stock from its shareholders, which is unrelated to the margin account dynamics.