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margin call meaning

By October 19, 2020 No Comments

A call for additional funds or securities in a margin account either because the value of equity in the account has fallen below a required minimum (also termed a maintenance call) or because additional securities have been purchased (or sold short).

The account now has $172,500 in it. The equity the broker gave is still in there. The brokerage enforces a maintenance margin of 30%. A margin call has the potential to be catastrophic for investors, turning a poor investment choice into a much bigger issue. Keep money and/or other easily liquefied assets available and saved for if you do face a margin call to avoid the aftermath of being unable to pay it. If you can't pay your margin call, the broker will begin selling stocks and/or liquefying the assets in your account. And even with all that damage, there's also the distinct possibility of a brokerage filing a lawsuit against you, taking up severe time and money. Now only $47,500 of that is yours, which is just 27.5% of the account.

With a margin account, the investor and the broker start off investing the same amount in securities. Your margin call is the difference between what is needed and what you have: 51,750-47,500 = $4,250. Buying on margin is one of the riskiest ways to invest specifically because of the way it amplifies losses when things go south. Once this happens, you now have to deposit the necessary funds to get to at least 30% of that total, which would be $51,750. Keep the risks in mind, keep some funds saved for if you need it, and stay constantly updated on how the investment is doing. How much will you have to sell? Another way to try and mitigate the risk of a margin call is to pick less inherently risky investments. Let's do some math. What is a margin call, what happens if you are unable to pay it and what should you do to avoid it? You thought this was a safe investment, but something bad happens to the company.

But if you are seen as dependable and likely to add to the account and re-reach that threshold, you're likely to get an alert. They're just going to start recouping their losses. When an investor sets up a margin account, he is allowed to purchase stocks with his own funds and borrowed funds from his broker. An incredibly worrying decline, sure, but you are still above the requirement. The losses sustained in this period can then become debt you owe, meaning failure to make your margin call is just the beginning of the losses for the unlucky investor. The brokerage reports your debt to the various credit agencies, and your credit score is sure to take quite a hit. You decide to open a margin account with a brokerage. If the investment fails to a point that your account is below the minimum margin, they technically don't have to alert you of the margin call and can just start liquidating your assets to reach the threshold. Should you deposit the necessary funds, your amount of equity increases and the margin decreases, and for now the balance of the margin account is restored.

Going in without a ton of information just because it gives you more capital to invest with can be disastrous, but preparing accordingly in advance can help you do as best you can to prevent a worst-case scenario.

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