Margin Call refers to a call sent to a trader when the amount in the margin account of any trader falls below a certain level. A margin call occurs when the balance of a trader's margin account falls below the amount the broker expects. A margin call can be defined as a warning call to the account when the account amount falls below the required margin ratio.

A margin call indicates that the value of the securities held in the account has fallen below a certain level. In such a situation, investors must either transfer more money into the account or sell the assets held in the account. A margin call occurs when the trader's equity in the margin account falls below a percentage set by the broker.

A margin account is securities bought with the investor's equity capital and the amount borrowed from the broker. A margin call typically occurs when the account is running low on funds due to losing trades. Investors who wish to maintain the margin account must provide an additional investment or sell the securities in the account.

When Is a Margin Call Realized?

An investor is trading on margin when the investor provides payment to trade securities with their funds and the amount of money borrowed from a broker.

It is triggered when the investor's account balance falls below a certain level of a percentage of the total value of the securities. Margin calls can occur due to a decreasing the amount in the margin account. A margin call is more likely to occur when the market is volatile.

The following options can be applied when faced with a margin call:

• Depositing additional cash into the account to meet the margin level (maintenance margin).
• Additional securities can be transferred to the account until it meets the margin level.
• Assets can be sold to close the deficit and meet the margin level.

How to Avoid Margin Call?

Before creating a margin account, traders should determine whether they really need a margin account because long-term traders do not need to practice margin trading to make a profit. There are some clauses for users who decide to trade or do so on margin to avoid a margin call.

The following can be done to avoid a margin call:

• Having cash on hand that can be deposited into a margin account in case of a margin call.
• A diversified portfolio can be created. A single asset or position can reduce the account value, so having a diversified portfolio can limit margin calls.
• Open positions, capital, and margin credit can be monitored continuously.

What Is a Maintenance Margin?

The maintenance margin is used to indicate the minimum percentage of investments that must be held in a margin account. The maintenance margin refers to the amount of funds that must be held in the account to keep positions open.

Example of Margin Call

As an example of a margin call; Suppose there is $10,000 in an account and another $10,000 is borrowed from the broker. In total, we invested $20,000 of capital in X one share and bought it at $100 per share. The maintenance margin in this case is 30 percent.

Minimum account value to avoid margin call = Margin credit / (1 - maintenance margin)

According to the example, if the value of the account falls below $14,285 or the value of stock X bought falls below $71, a margin call may be faced. If the stock falls below $60, the account value is $12,000, $1,600 less than the 30 percent margin requirement. There are several options in this situation:

• Meeting the margin call ($1,600).
• Investing marginable assets.
• Buying stock X ($5,333).