Let's understand what is a Margin Call

Binary Options Broker Reviews

June 18

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A margin call happens when the value of assets in an investor's margin account drops below a specified threshold, leading the broker to request additional funds to meet the minimum maintenance margin requirement. Essentially, it's a warning that the account's value is too low and action is needed to restore it to an acceptable level. Typically, a margin call indicates that the value of one or more stocks in the margin account has decreased. The investor must either deposit more funds or sell some of their marginable securities to satisfy the margin call. In simple terms, a margin call occurs when the assets in an investor's margin account fall below a certain level. To address a margin call, traders must deposit funds, sell securities, or reduce the loan amount. Margin calls do not apply to binary options trading.

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=> Managing Risks of Trading on Margin

Using stop losses can help prevent significant losses when trading on margin. Keeping leverage low and lending against a diversified portfolio can also mitigate the risk of a margin call, which is more likely when trading on a single stock.

=> Example of a Margin Call

Imagine you want to purchase $250,000 worth of stock at $100 per share. You and your broker each contribute $125,000. The brokerage requires a 30 percent maintenance margin to keep operations viable. If the stock's value drops, reducing your margin account to $187,500, your initial investment is now $62,500, which is still above the minimum requirement. However, if the stock price falls further to $69 per share, the account balance becomes $172,500, and your share is $47,500, only 27.5 percent of the account. This triggers a margin call from the broker.

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