Margin Call on its collateral requirements is usually associated with a fall in the price of securities below a specified parameter, which is called the maintenance margin, that is, it is a direct requirement addressed to the account holder to deposit either cash or some other collateral to meet the margin requirement. It should be understood that such a requirement can only be applied to a trading account that has borrowed funds to trade.
Learn more about Margin Call
You do not have to be a fairly large trader from New York, a margin call can also happen to an individual investor who is trading on margin. Let’s break down how this happens.
If your account type is a margin account, this means you are trading certain assets using borrowed money, this gives you the opportunity to make purchases with funds, some of which are yours and some of which belong to the broker. So the funds that are given to you by the broker are called a margin. On the one hand this is a plus because you get much more income, on the other hand your risk increases in direct proportion.
The investor in this case also has a requirement that he always has in his account the amount that will support the walrus. And when the total of your assets becomes lower than the maintenance margin line, the broker issues his demand.
How to Behave
As one of the options, you can deposit additional funds as required by the request
You can also put any other assets into your account
You can close open trades or sell some shares, sometimes at a price well below the purchase price
In some cases, the broker is given the option to sell the assets in your account on their own to satisfy this request. By regulation, you are given up to 5 days to fund your account.
How to avoid this
The easiest and most obvious way is not to have such an account. If you do not have enough experience, then working on margin trades, will not bring you the results you need. If you do open such an account, read the recommendations:
Always own additional funds, that in case of need to overlap margin requirements. This is the most convenient way.
Reduce volatility, always diversify your portfolio as well. Don’t invest most of your funds in highly volatile assets.
If you have an insignificant level of available funds in your balance, review your portfolio daily and again diversify if necessary.
Let’s break down what margin requirements look like with an example
Let’s assume you have 10,000 on your balance, you have borrowed the same amount from the company you are working with. With your 20,000 you want to buy 200 shares, which sell for $100 each. In this case, your margin is 30%.
Here’s the formula to calculate the minimum amount needed in your account in order to avoid a Margin Call, by dividing the amount of the margin loan by the supporting margin.
From this example: if the capitalization of your trading account falls to 14285.71 U.S. dollars, you will receive the same Margin Call, it follows that if the value of the shares, or more precisely, if the price falls to 71.42 dollars, you will receive a Margin Call.
Let’s say you bought shares at $100 apiece, force majeure happened, the value of one share dropped to $60 a share. So with 200 shares, the value of your trading account is now only $12,000. This means that you now have a $1,600 deficit on your balance sheet. Just the right amount to provide 30% of your walrus. In this case, you can do the following:
Deposit $1,600 into your account.
Add any other securities to your account
Sell shares in the company for an amount of $3333.33 in order to pay your broker.
You must realize that if the price of a stock continues to fall, you will have to deposit more and more into your account to maintain your margin requirement.
An interesting point is that if your account has 10.000 of your funds and 10.000 from the company, in this case, when the share price decreases, it is the trader who bears the losses first. This means that if the stock has halved in value, the client is left with zero, and the broker returns his 10.000.
Not every broker will put margin requirements to the client, during the period of strong volatility, may start to sell your assets on its own initiative. This is done to reduce the risk of the brokerage company.
You should understand that this strategy is not for long-term traders. Margin requirements will force you to invest more and more funds or stocks. It is better to have funds to spare than to sell your securities at a low price. Carefully analyze your risks before you start trading on margin.