What Is a Margin Call: Understanding and Managing It

Margin trading is a cornerstone of many speculative accounts. To achieve consistent returns, it’s critical to understand both the ins and outs of margin trading and the causes behind margin calls. This article explores the fundamental concept of margin calls, provides an illustrative example, identifies triggers, outlines the consequences when a margin call isn’t met, and gives pointers on how to cover margin calls and prevent them from occurring in the first place.

Key Takeaways:

• Margin calls are demands from asset lenders, typically brokers, requiring traders to increase the collateral held in their margin trading accounts.

• While margin trading can amplify profits, it equally elevates risk, making margin calls a protective mechanism that prevents traders from incurring losses exceeding their initial investments.

• Avoid margin calls by practicing proper risk management, understanding margin requirements, using leverage wisely and regularly reviewing your positions.

What Is a Margin Call?

A margin call is a demand from an asset lender, typically a broker, to increase the amount of assets held as collateral in a margin account. At its core, a margin call serves as a protective measure, acting as a safety net for traders and investors engaging in leveraged positions within financial markets.