Trading 101: What is Margin Call Trading?

If you are buying shares on margin, you should maintain the minimum balance in your account as stipulated by the broker. The margin balance should be maintained so that you will be eligible for margin purchase. If you fail to maintain the margin money in your account, you will get a margin call.

Trader is doing margin trading

The margin call will be made by the broker to request you to deposit more money in your account so that you will not be penalized. If you fail to manage sufficient money in your account as per the margin call definition, you should want to sell equities to manage sufficient balance.

When will you get margin calls?

The broker will monitor your account balance on a consistent basis. If you go for purchase of stocks by utilizing the margin money offered by the broker, you should ensure that the margin percentage is maintained without fail. There are instances you will get margin call from the broker when the security price falls down. As the interests of the broker should be safeguarded, you will want to increase the margin money in your account.

If you fail to increase the margin money in your account, you will get a call from the broker. You will be requested to sell part or full securities that are present in your account and the proceeds will be adjusted as per the margin money requirements.

Brokers will call investors as they would like to avoid the risk of defaulting the loan granted by the broker. The margin should be maintained by the investor as per the agreement executed during the account opening process. However, the securities will be disposed of by the broker if the investor fails to take action in spite of the repeated appeals made by the broker. This step will be taken in extreme cases. It is ideal to pump more money when you fail to maintain the margin money. You will be able to sell the stock when you get the right price. It is possible to offset your losses as well by depositing more money in your trading account.

Risks and returns

There are risks as well as returns associated with the margin trading. If you utilize the trade margin offered by the broker, you can expect bigger returns. You will be able to purchase securities worth of 5 or 6 times of the deposit money. Hence, there will be great returns when the stock price is upwards.

There will be great risk as the stock price may drop due to various reasons. Seasoned traders and investors will be able to make wise decisions. They will get various clues which can affect the stock price and they will enter into trade and exit the trade at the most appropriate time so that the losses will be minimized. Experienced traders will also apply limit order and various conditions to increase profits and they will take wise calls by going for short trading as well. Hence, there are risks as well as returns associated with margin trading and you will get margin call when you fail to manage sufficient balance in your account.

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