Before learning about Margin Call Trading, you must know the Margin Call Meaning in Stock Market.
A margin call will occur when the securities’ value falls below a set level of your Brokerage Account. This level is the maintenance margin. It requires the additional cash deposit or securities from the account holder to meet the requirements of margin.
A margin call is the brokerage firm's demand that the investors must increase the equity amount in their accounts. Margin call only occurs to the account that an investor used to borrow money for purchasing securities.
Margin Call only occurs in the fast-declining market. But when it happens, you must learn how to avoid them as soon as possible.
Margin Call may seem like happening only to the Wall Street big companies but no, it can also happen to any investor who purchased securities using borrowed money or on margin.
When you have opened your margin account with the help of any online broker, you must purchase stocks, bonds, and other securities including ETFs (Exchange-Traded Funds) with the borrowed money and also your own. This will help you easily trade and multiply your returns. This works both ways; positively and negatively.
A margin call indicates to the investor that the value of some of the securities that he has in the account has decreased and he must deposit margin securities or additional funds in the account.
Margin Call Meaning in Stock Market is when you have low funds on your margin account due to loss of trade and you have to add funds or securities.
Margin Call is the demand from the brokerage to bring the additional capital or securities to meet the minimum amount of maintenance margin.
A margin account allows you to make short sales but if the stock price goes up and your accounts start mounting showing you just sold short stock.
Brokers will insist you sell off some of the assets without considering the market price so that you can easily meet the margin call requirements if you are not able to deposit additional funds. This is called transferring additional securities.
You must know that if you are not able to fulfill the request for a margin call quickly, then the brokers have the right to sell some of your securities without seeking your permission for covering the shortfall. You have to respond fast in a 2 to 5 days period to such a margin call. But if you are dealing in a volatile market, then this time will be shorter.
What are Margin Call Options?
Margin Call Options means when the brokerage needs a client with written options to provide the additional funds (cash) or stock for the open positions. This will work as collateral. If the investor cannot meet with the margin call, the brokerage will close some of the options positions without informing you.
Several reasons could trigger the Margin Call Options. These reasons are listed below,
Market going against the relative position. This can increase the obligation of the options contract.
The brokerage has to increase the Margin Requirements for Options of your positions. Or it will help you increase the collateral value of your shares used for covers.
Why you should know about Margin Requirements for Options?
There is always uncertainty in the market and it leads to risk and the margining system of stock markets is aware of this.
If an investor purchases a total of 1000 shares of some ABC company on January 1, 2022. Then, he has to pay a total of Rs. 1, 00,000/- amount calculating shares 1000x Rs. 100. He has to pay this amount before the next day on January 2, 2022. So, now the broker has to submit the amount to the stock exchange on the day after January 3, 2022.
So during this short time, the investor may not be able to provide the requested amount on the required date. At the time of placing the order, the investor will have to submit some portal of the total amount. A similar amount is collected from the broker by the stock exchange. So this initial payment made is known as the margin.
Let's assume that the previous example has a margin of 15% which means 15,000 per Rs. 1, 00,000. And on the same day of purchase of shares, if the price falls below Rs. 25,000 (Rs.25 each) then this is the notional loss to the buyer. He already paid Rs. 15,000 but now the value of the total shares is Rs. 75,000.
So why would the buyer pay Rs.1, 00,000 for the shares of Rs.75, 000? On the contrary, if the price increases by Rs. 25 then also the buyer would not give up the shares easily at just Rs. 1, 00,000.
Therefore, both the brokers and sellers need to ensure that they both fulfill each other's obligations regardless of the movements in the price. So for each requirement, an investor and broker need to agree.
Margin Call Calculator
If you do not know how to calculate the margin call, then you can take the help of many Margin Call Calculators available online. You will just need to select some options and enter the cost, sales revenue, and gross margin to calculate the Gross Margin, Gross Profit, and MarkUp.
The meaning of these Margin Call Calculator terms is as below,
o Cost means the product’s cost
o Sales Revenue is the revenue the seller generates with the sale of a product.
o Gross Profit means the % of the product’s profit versus the revenue.
o Gross Margin means the % of gross profit of the product’s profit versus revenue.
o Markup here is the % of the profit versus cost.
There are many other options for Margin Call Calculator such as Stock Trading Margin Calculator, Margin Calculator for Currency Exchange, and others.
So, the Margin Call Trading is the Trading on Margin. You must always meet with your maintenance margin to avoid the Margin Call. Please keep in mind the below steps to avoid the possibility of a margin call,
Keep Extra Cash with you
Limit the volatility with diversification
Always monitor your account regularly