What is margin call:

A margin call occurs when the percentage of an investor’s equity in a margin account falls below the brokerage’s pre-agreed maintenance amount. broker requires a trader to deposit additional funds or close positions to maintain the required margin level. This typically happens when the equity in a trader’s account falls below a specified threshold due to losses on leveraged positions.

When does margin call happens:

A margin call occurs when a margin account runs low on funds, usually because of a losing trade.Margin calls are demands for additional capital or securities to bring a margin account up to the maintenance requirement.

Brokers may force a trader to sell assets, regardless of the market price, to meet the margin call if the trader doesn’t deposit funds.

 Margin calls can also occur when a stock goes up in price and losses start mounting in accounts that have sold the stock short.

Key Points:

• Leverage Impact: When using leverage, small price movements can significantly affect your account balance, potentially triggering a margin call
• Immediate Action Required: Traders must act quickly to either deposit more funds or reduce their positions to avoid liquidation of their trades. Some brokers may give you two to five days to meet the margin call but the fine print of a standard margin account agreement will generally state that the broker has the right to liquidate any or all securities or other assets held in the margin account at its discretion and without prior notice.
• Risk Management: Understanding margin requirements and maintaining a buffer in your account can help prevent margin calls.

How to Avoid a Margin Call

Investors should carefully consider whether they need a margin account before opening one. Most long-term investors do not have to buy on margin to earn solid returns. And these loans aren’t free. Brokerages charge interest on them But there are a few things you can do to manage your account, avoid a margin call, or be ready for it if you want to invest with margin

• Make sure cash is available to place in your account immediately. Consider keeping it in an interest-earning account at the same brokerage.
• Build a well-diversified portfolio. This may help limit margin calls because a single position is less likely to decrease the account value.
• Monitor your open positions, equity, and margin loans regularly, even daily.
• Create a custom-made alert at some comfortable level above the margin maintenance requirement. Deposit funds or securities to increase your equity if your account falls to it.
• Take care of it immediately if you receive a margin call.
• A good way for an investor to avoid margin calls is to use protective stop orders to limit losses in any equity positions in addition to keeping adequate cash and securities in their account.