Margin Call

Understanding Margin Calls

A margin call is a situation where an investor’s margin account, which consists of assets purchased with borrowed funds, is at risk of running out of funds. This account typically includes the trader’s personal money as well as borrowed money. In this scenario, the broker will require the investor to deposit additional money or securities to meet the minimum required maintenance amount for continued trading.

A margin call is often triggered by a losing trade that puts the funds at risk of depletion. To avoid having to close the position, a trader can choose to add more money to the account. However, if adding more funds is not feasible, closing the position becomes inevitable. Interestingly, the brokerage has the authority to close the position without seeking consent from the trader.

Traders have the ability to calculate the precise amount by which an asset must fall in order for a margin call to be executed. They can utilize stop orders, which are instructions to buy or sell an asset on a trading venue, including cryptocurrency exchanges. The purpose of stop orders is to mitigate risk exposure and prevent margin calls from being triggered. This is particularly important during periods of high volatility, as stop orders help prevent significant losses.