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A margin call is a request from a broker or lender for additional funds or collateral to be deposited by an investor in order to maintain the appropriate margin level on a trading account. It happens when the value of the securities or other assets that are being traded on margin declines, bringing the account's equity below the minimum threshold.
The broker often requires a specific amount of equity in the account as security when an investor borrows money from them to buy stocks or other assets. The margin is this equity, and the broker or lender chooses the necessary margin amount. The equity in the account may drop below the necessary margin level as a result of a decline in the value of the assets being traded on margin, which would result in a margin call.
In the event that the investor is unable to repay the loan, the broker or lender will be shielded from losses by a margin call. The broker or lender may sell some or all of the securities or assets in the account to settle the outstanding loan balance if the investor fails to deposit additional funds or collateral to satisfy the margin call.
Investors who trade on margin face considerable risk from margin calls because they can force the forced liquidation of assets and cause sizable losses. Investors should closely monitor the value of their trading positions and keep enough equity in their accounts to meet the necessary margin levels to reduce the danger of a margin call.
