What is a margin call?

A margin call is a demand from a broker or lender for an investor to deposit additional money or securities into their account to cover potential losses. It typically occurs when the value of the securities in the investor's account falls below a certain threshold, known as the maintenance margin.

How it works:

When an investor borrows money from a broker to purchase investments on margin, they are required to maintain a certain level of equity in their account, known as the initial margin. If the value of their securities drops below the maintenance margin level due to market fluctuations, the broker will issue a margin call to bring the account back to the required level.

Consequences of a margin call:

If an investor fails to meet a margin call, the broker has the right to sell off some or all of the investor's securities to cover the shortfall. This can result in significant losses for the investor and may lead to the account being liquidated to pay off the debt.

Conclusion:

Margin calls are a risk associated with trading on margin and can have serious financial consequences for investors who are unable to meet them. It is important for investors to carefully monitor their accounts and be prepared to respond to margin calls to avoid potential loss of investments.