Margin Call

Definition:

When a broker requires an investor that is using margin to add additional deposit funds so that the margin account returns to the minimum maintenance margin amount. A margin call happens when your account value drops to a value below that allowed by a broker. For example, if a stock, purchased on margin, drops in value, the amount of your money in an account may drop below the specified percent of the investment that you agreed to when you chose to buy the stock with margin.

Margin Call Example:

Let’s say you have posted your initial margin on a short trade of a 1000$ and then the price of the stock goes up. Since you shorted, you will be at a loss. Your broker will then call you (or perhaps e-mail you) and let you know that you need to add additional margin to get back to the specified maintenance margin. If you do not within a certain period of time, laid out by your broker, he will automatically close your position.

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