Margin Call – what is it?
Margin Call is a situation in the financial market in which a broker requires an investor to replenish his investment account in order to maintain the minimum margin level. Margin Call is the result of a decrease in the value of assets in the investor’s account, which leads to a reduction in the level of collateral below the required minimum. The margin call is intended to reduce the risk for both the broker and the investor.
In practice, a Margin Call occurs when the value of an investor’s position falls and the level of collateral is insufficient to cover potential losses. In such a case, the broker contacts the investor, requesting additional capital or liquidation of part of the open positions to restore an adequate level of collateral. If the trader fails to provide the required funds within the specified time, the broker can close the positions himself to minimize losses and protect his interests.
Margin Call is particularly important in leveraged trading, where the investor uses borrowed funds to increase potential profit. However, the use of leverage comes with a high risk, as price changes can lead to a rapid reduction in the value of the position and the need to replenish the margin. Therefore, investors should monitor their positions and have enough capital to prevent Margin Call.
Frequently asked questions
1. What is a Margin Call?
Margin Call is a broker’s call to replenish the investment account in order to maintain the minimum margin level. It results from a reduction in the value of assets below the required margin level.
2. What happens when I receive a Margin Call?
When an investor receives a Margin Call, he must deposit additional funds or liquidate some of his positions to restore the appropriate collateral level. If he fails to do so, the broker may close open positions to protect his interests.
3. How to avoid Margin Call?
To avoid Margin Call, traders should monitor their positions and maintain a sufficient level of funds in the account. Risk management strategies such as setting stop losses and avoiding too much leverage can also be used.
4. Why is Margin Call important when investing with leverage?
Margin Call is important when investing with leverage because leverage increases both potential returns and risk. Even small price changes can lead to large losses, which can result in the need for margin calls.
