Margin Calls happen when a trader borrows money from a dealer or broker to make initial investments. This is paid for with a combination of funds from the trader and by using some of the broker’s funds. Equity in the investment is achieved with the trader having equity that is equal to the securities’ market value, minus what they have borrowed from the broker. When the trader’s equity falls below a certain percentage, a margin call is triggered. This percentage is called a maintenance margin. This can vary depending on the broker but federal US states that there should be a minimum margin of 25%.
What about Margin Calls with Forex?
When trading Forex, a margin call informs the trader on behalf of the broker to deposit more money into the Forex account as it has fallen below the minimum value that the broker requires. To put in more simply, it means that one or perhaps more than one of the margin account’s securities has fallen below a certain point due to a decrease in value. You are, in fact, liquidated out of your trades. The trader would need to then deposit additional funds or sell some assets that are in the account to make up the shortfall as you can no longer hold the positions of your trades. The broker, here, is liable for your losses unless you deposit additional funds.
Let’s look at an example:
An investor wants to start trading and so deposits money into a margin account before beginning trading. The amount that needs to be added to the account is dependent on the margin that has been agreed between a broker and an investor. If a currency will be traded in 10,000 currency units, the margin could be 1%. This means that an investor who wants to trade $10,000 would have to put a minimum of $100 into the account and the remaining money is put up by the broker. Interest can later be charged on this amount if the investor does not close their position before the assigned delivery date.
What is the money used for?
The $100 is used as a sort of security deposit. If the position worsens and the investor’s losses are coming close to the amount deposited, the broker will initiate a margin call and this is when the instructions to add additional funds or pulling out will be required by the investor. Essentially, a margin call is there to limit the risk to the broker as well as to the investor.
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