Margin Call

1. Definition

A Margin Call occurs when the value of an investor's margin account falls below the broker's required amount. * It is a demand from the broker for the investor to deposit additional money or securities so that the account is brought up to the minimum maintenance margin.

2. How it works

When you trade with leverage (borrowed money), your equity acts as collateral. 1. Initial Margin: The money you put down to open the trade. 2. Maintenance Margin: The minimum equity you must hold at all times. 3. The Trigger: If your losses eat into your equity and it drops below the Maintenance Margin, a Margin Call is triggered.

3. The Consequence

If you fail to meet the margin call (i.e., you don't deposit cash immediately): * Forced Liquidation: The broker has the right to sell your assets without your permission to cover the loan. * They will sell until the account is back to the maintenance level, often realizing huge losses for the trader.

4. Key Takeaway

• Leverage magnifies both gains and losses. A margin call is the mechanism that prevents the broker from losing money, transferring all the risk of total ruin to the trader.