Avoiding and Managing Margin Calls
Trading on margin offers a variety of potential benefits, as well as some additional risks, including margin calls. This lesson explains margin calls, your obligations, and what you can do to help avoid them.
A margin call is a demand from your brokerage firm to increase the amount of equity in your account. You can do this by depositing cash or marginable securities to your account or by liquidating existing positions to generate cash.
To avoid margin calls, you need to understand fully what triggers a margin call, along with the steps you can take to minimize the risk of a margin sellout.
Margin calls can be a stressful experience with serious financial implications. Your brokerage firm may sell securities you own—without notifying you and without regard to tax consequences—in order to increase the equity in your account. Therefore, consider these suggestions to minimize the odds of experiencing a margin call:
Prepare for volatility: Leave a considerable cash cushion in your account that protects you from a sudden drop in the value of your loan collateral.
Set a personal trigger point: Keep additional liquid resources at the ready in case you need to add money or securities to your margin account.
Monitor your account daily: Consider setting up alerts to notify you when the value of your positions declines significantly.
If you fail to understand the concept of margin or not knowing what to do when faced with a margin call from your broker, you will definitely experience the shock of your trading account blow up.
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