DEFINITION of Margin call
The margin call is one of the harshest experiences a trader might face. It is known as a margin call.
WHAT IT IS IN ESSENCE
What exactly is a margin call? When you open a margin account with your broker, you tell them that, at some moment, you may want to borrow money from them.
You do this by pawning the cash and securities in your account as collateral for the margin loan.
Once you borrow the funds to purchase securities, the broker can then sell off your other assets. Of course, if it is necessary to satisfy your margin loan. Which may be a potential disaster in appearance.
If your investment account doesn’t have enough worth to satisfy the margin loan, you are legally obliged to come up with the entire remaining debt balance.
That is, you can lose much more than the deposit into your account is.
A margin call occurs when the required equity relative to the debt in your account has fallen below certain limits, and the broker demands an immediate fix. Either by depositing additional funds, liquidating holdings, or a combination of this two.
HOW TO USE
In short, margin trades require a certain amount of funds to remain open. If a trade loses money and the funds in your account are no longer enough to keep the position open, your provider will ask you to fill your account. This is a margin call.
If you fill funds, the position will remain open. If not, your provider may close the position and any losses will be realized.
In many cases, the best option may be to raise money. However, you have to wipe out the debt within days, and sometimes, it means it means selling other assets such as cars or furniture.
Also, you may choose to consult as quickly as possible with a bankruptcy attorney. If the filing is the right call, they might advise you to do it sooner than later.
So, you have to do it anyway.