If you want to buy $50,000 worth of shares and you want to go to a margin lender, they will expect you to put up the first $25,000.
A margin call may result if your portfolio falls below certain limits. If your $50,000 share portfolio fell in value to $30,000, the lender will become nervous and want you to repay part of the loan to reestablish a conservative loan to value ratio, in this case they might ask for another $10,000, so you'll only owe them $15,000, and this is secured against the $30,000 share portfolio.
Not all lenders have margin calls as part of their standard policy, if this is a concern to you you should shop around. In general though, if you go with a lender that promises not to ask for margin calls there will be a catch, like high interest and a very limited list of pre-approved investments.
I ran the numbers on a margin product from a major Australian bank and found that the terms were pretty extraordinary. Minimum $200,000 investment, you could invest only in a basket of Australian blue chip stocks of their choosing, stocks like BHP, National Australia Bank and Telstra. The interest rate was 18%pa over 5 years. You just pay the interest and then the principle at the end of the five years. You borrow $200,000, pay $180,000 in interest payments over five years and give them back their $200,000, so you pay them back a total of $380,000, if any share makes a loss they take the share instead of the cash repayment.
It is a pretty sweet deal for the lender, worst case scenario is that over five years you pay them back almost the full initial amount in interest payments and their biggest downside loss is they could end up holding a bunch of blue chip stocks. I would wonder though, if any investor has the slightest hope of making any money out of this with such a high interest rate. A lot of margin lenders offer terms like this. In this case the bank couldn't lose, but for the investor it does look a bit harsh, I don't think you can justify borrowing with a real interest rate above 10%.
Margin calls are a reality in most forms of gearing where you borrow. If it is a managed fund the margin lender might be more generous with their gearing ratio compared to a few direct shares, and they might look more favourably on a situation where you want to borrow to buy a few blue chip shares rather than less well known issues. In general they will look more favourably on investments into well known diversified trusts rather than boutique sector and specialist funds.
You'll have margin calls on investments into property trusts if the value of the investment falls below the lender's guidelines, just as you would with a share trust, but normally you don't get margin calls with direct property investments, instead the lender will try to lend conservatively to start with, insisting on a large deposit and/or an independent property valuation and other guarantees before they give the money.
Margin calls are awkward because they necessarily come at a bad time, when the investment has fallen in value. You may be forced to pay the margin call by selling assets, which would be a real pity if this happened at the same moment as the market bottomed out.
First of all, you can use a home equity loan, with your home as the collateral. This method is fine, and I think should be the first form of credit you seek if you want to borrow to invest. You'll pay the same interest rate as your home mortgage, which is pretty much the lowest rate you will be able to get anywhere, and the only thing that bothers the bank is your regularity of paying it off. You can then invest in whatever you like and provided you are comfortably able to repay your mortgage you will be fine.
You can use a home equity loan for anything, including holidays and cars etc, so provided you have sufficient equity in your house you will have nothing to fear from a margin call with this type of loan.
There are two other forms of loan that are not subject to margin calls, but I'm not crazy about either of them. The first is basically an unsecured loan, a standard personal loan from a bank or credit union. The interest rates are very high and I don't recommend them, but if you are that keen on gearing and can't use another form of loan then it is your only real option.
The other form of non-margin loan you could use is a protected equity product. These are the loans I briefly alluded to above, the one with the huge minimum investment and high interest rates. Interest rates are even higher than an unsecured loan (because the lender has to buy put options to hedge your portfolio, because they offer a capital guarantee on the investment). The interest expense above the usual unsecured rate is regarded as a capital protection fee by the tax office as opposed to a borrowing expense, so you can't claim all the interest as a tax deduction, only the amount up to the unsecured interest rate.
I've seen examples of them being used and in the literature they do seem plausible to an extent, but the assumptions for growth are to my mind a little bit optimistic and I am not entirely certain that investors will make much money out of these, even with the tax expenses. This sort of protected equity product is most suitable for people with a very high income but no home. Personally I think the interest rate is just too high and would recommend installment gearing with a conservative loan to value ratio instead.
I just alluded to a conservative loan to value ratio. This is the last point and it is a good way to avoid margin calls. It is quite simple to do.
The lender may well be willing to lend 70% of the value of the portfolio, but I don't think this is really all that flash an idea. If you borrow 70% you have no margin at all to allow the market to fluctuate (well, in practice they give you a little buffer, but I'm choosing to ignore that).
Being prudent I like to invest with the implicit assumption that the investment is going to lose 50% of its value, at least temporarily. If you can avoid a margin call with a 50% fall then you are doing ok. How do you do that? Well if you only borrow 35% of the value of a portfolio from a margin lender you will have the required buffer (with a 70% LVR margin loan) to endure a 50% fall.
Only 35%? That's not very much! Well fear not intrepid entrepreneur, because the remaining funds don't necessarily have to come from your bank account, you could use a home equity loan to come up with the other 65%. So if you borrow $65,000 as a home equity loan, you can then borrow another $35,000 from a margin lender and have a $100,000 portfolio and you won't have to worry about margin calls except in really extreme circumstances. If you have a reasonably diversified portfolio that includes a meaningful amount of diversification into property trusts and various types of share investment you probably won't have to fear a 50% drop, but as a doomsday scenario it makes sense to me.
If you think 50% is unlikely and would prefer not to be such a sissy, you might choose to assume a 30% drop instead (for a diversified portfolio that is a pretty big drop!). If you want to build a portfolio without fear of margin calls with a 30% drop you can set your borrowings to 70%*70% = 49%.
By combining the different types of loan you can secure a reasonably low interest rate (home equity loans have the lowest interest rate, margin loans the next lowest) and also buffer yourself against margin calls. We know from history that gearing is a good strategy (as evidenced by the much higher rate of return of stocks and property than cash investments) but we also know that borrowing is extremely dangerous, ruining as many people as it made wealthy. The disasters that have occurred in the past inevitably came because people got greedy and used borrowing to excess.
If you can afford the interest payments (including a margin of safety) and don't need to fire sale anything to meet margin calls you will be in a much better position to benefit from gearing as a long term investor, as opposed to having it turn around and bite you the way it often does with less cautious investors.