Margin Call

What Is a Margin Call?

A margin call transpires when the value of an investor's account falls far below the margin maintenance amount. The assets in an investor's margin account were purchased using borrowed monies. It is usually a mix of the bitcoin trader's personal funds and borrowed funds. 

The broker will then require the investor to deposit additional funds or securities to reach the minimum needed maintenance amount to continue trading. A margin call is usually imposed when funds are about to run out due to lost trade. 

A trader can add money to the account to prevent canceling the position. If the option of adding funds to the account is not feasible, the position must be closed. The brokerage can do this even without the trader's permission. 

Traders can also determine the exact amount an asset must fall to for a margin call to be performed. Stop orders can decrease their risk exposure and prevent margin calls from being provoked. 

Stop orders are instructions to buy or sell an asset on a trading platform, such as cryptocurrency exchanges. They are intended to protect against massive losses during extreme swings and high volatility periods.

Consider an Example

Assume you've put $10,000 into your account and decided to borrow another $10,000 on margin from your broker. You choose to invest your $20,000 in 200 shares of ABC business, which trade for $100 per share. Your maintenance margin is 30 percent. Note the following formula,

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

In this case, if the account's market value goes below $14,285.71, you will be subject to a margin call. Likewise, if the stock price of ABC business falls to $71.42 or lower, you will face a margin call.