What is a Margin Call?

A margin call is a demand from a broker or financial institution for an investor to deposit additional funds or securities into their trading account or margin account. This may be due to a decrease in the value of securities in the account or due to a loss in an open trade. This is an important point in trading, as it affects whether a trader can hold onto their position or must liquidate it to meet the margin requirements.

A margin call is triggered when the total market value of securities in a margin account dips below the account’s margin requirement. This requirement is usually set at a certain percentage of the account’s total value—generally 50% or 25%. For example, if a margin account has a total of $10,000 in securities and the margin requirement is 25%, then the account must maintain a value of at least $7,500. In this case, if the account value dips below $7,500, a margin call will occur.

The broker will then contact the investor and inform them that they must either deposit more money or liquidate some of their securities to bring the account up to the maintenance margin level. Brokers may also force a liquidation of some of the investor's assets regardless of the market price if the investor doesn't deposit enough funds to meet the call.

Can Margin Calls Be Avoided?

Although margin calls are an essential part of trading on margin, you can avoid them by regularly monitoring your equity and making sure that you have enough funds in your account to maintain the value at or above the required maintenance level. You can also set up stop-limit orders that will close out a trade once it reaches a certain threshold. This will ensure that you remain above the margin requirement even if the market goes against your position.

In conclusion, a margin call is an important factor in trading and it is important for investors to pay attention to the margin requirement and to keep enough funds in their accounts to meet it. Although there is no way to ensure that a margin call will never happen, you can reduce the chance of one occurring by monitoring your account and setting up stop-limit orders.