Margin Call: What it is and How to Avoid One

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A margin call is an order from a broker to a client that more funds are required in the account to maintain open positions. A margin call when your account value falls below the maintenance margin requirement. If a margin call occurs, you will need to immediately deposit additional funds into your account or close out some or all of your open positions.

Most brokers will automatically close out positions if a margin call is not met, so it is important to have margin call explained and how to avoid one.

When do margin calls happen

A margin call can occur either due to a change in the market value of the securities in your account or because you have made too many trades and your account has insufficient funds to cover the margin requirements for those trades. 

If the market value of the securities in your account falls, you may receive a margin call from your broker asking you to deposit additional funds. This is because the maintenance margin requirements are based on the market value of the securities, not the original purchase price.

Similarly, if you make too many trades and your account has insufficient funds to cover the margin requirements for those trades, you will also receive a margin call. 

How to avoid a margin call

To avoid a margin call, it’s important to understand both the initial and maintenance margin requirements for the securities you’re buying on margin. You can find these requirements on your broker’s website or by contacting them directly. Once you know the requirements, make sure to monitor your account balances and positions closely so that you can take action if necessary to avoid a margin call.

Margin Call

If you receive a margin call, you can deposit additional funds or securities into your account. You can also sell some securities to bring your account value above the minimum required level. Or negotiate with your broker to lower the margin requirement or give you time to meet the demand.

If you don’t take any action to meet a margin call, your broker may take action for you. This could include selling some or all of your securities to cover the shortfall. In some cases, your broker may even close out your entire account if you don’t meet the demands of a margin call.

Receiving a margin call can be stressful, but it’s important to remember that you have options. If you take the time to understand the margin requirements for your account and monitor your balances closely, you can avoid a margin call altogether. And if you do receive a margin call, you can take action to meet the demand and keep your account open.

If you’re thinking of buying securities on margin, it’s important to understand what a margin call is and how to avoid one. A margin call occurs when the value of your securities falls below a certain level, known as the margin requirement. If you don’t meet the margin call, your broker may sell some or all of your securities to cover the shortfall. To avoid a margin call, make sure you understand the margin requirements for your account and monitor your balances closely.

In conclusion

For most investors, buying on margin is bad since saving money for a long-term goal like retirement is best. You will be compelled to increase your account equity by adding more cash and securities or selling current holdings if you receive a margin call. Because margin calls are common during significant volatility, you may be forced to sell assets at bargain prices.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.