What is Margin Call?

Full Definition

A margin call is a demand from a broker or trading platform for an investor to deposit additional cash or securities into their account after a position bought using borrowed money (margin) or other leveraged trading has fallen in value to the point where the investor's own equity in the position drops below the minimum level the broker requires as collateral. Margin trading allows an investor to control a larger position than their own cash alone would support by borrowing the rest from the broker, which magnifies both potential gains and potential losses; if the position moves against the investor, losses are similarly magnified, and once the account's remaining equity falls below the broker's maintenance margin requirement, a margin call is triggered. If the investor cannot or does not meet a margin call by depositing more funds within the timeframe set by the broker (sometimes very short, occasionally the same trading day), the broker has the right to sell some or all of the position automatically to reduce the exposure and protect itself, regardless of whether the investor wants to sell at that price, which can crystallise a loss at the worst possible moment during a market fall. Because of this risk of forced selling and the potential to lose more than the amount originally invested, margin trading, short selling and other forms of leveraged trading are generally considered high-risk activities suited to experienced investors who fully understand the mechanics, rather than to typical retail savers using standard ISA or pension accounts, which do not permit this kind of borrowing against an investment position.

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