Margin Call: Understanding and How to Manage It

Receiving a margin call as a trader is something that no one looks forward to. This is definitely a bad position to be put in, but it does not have to be completely devastating. Here are the basics of how to handle a margin call when you receive one. 

Margin Call

If you are trading with a margin account, there is a chance that you could receive a margin call at some point. Margin accounts are common in trading the stock market as well as in the Forex market. When you are trading with margin, you are essentially borrowing money from your broker. You do this in order to increase the size of the position that you are able to open. This will create a scenario where you are using leverage in order to increase your returns. While this sounds like a great idea, sometimes it can work against you. Whenever you are using a margin account, you will have to keep a certain amount of your own money in the account known as the maintenance margin. If you are in the middle of a trade and it goes against you, the value of your account could fall below that maintenance margin. When this happens, your broker is going to call you and let you know that you are below the maintenance margin. This is known as a margin call and you can handle it in a few different ways.

Keep Your Cool

Regardless of your current financial situation, you need to keep your cool at all times. Many people start to get stressed out and end up making bad decisions whenever they receive a margin call. Whenever you get the call, you need to stay cool and try to think rationally instead of with your emotions.

Assess Your Mistakes

At this time, you should take a few moments to assess your mistakes. Whenever you are put in the position of receiving a margin call, this means that you have made the wrong investment decision. Try to determine exactly where you went wrong so that you can avoid this scenario in the future.

Start a Trading Log

You should also consider starting a trading log. This will allow you to keep track of every trade that you make so that you can improve your trading strategy. Whenever you see that you received a margin call, you will make a special note of the circumstances that were involved so that you can get out of the market if you see those circumstances again in the future.

Deposit Money

One of the options that you will have is to deposit more money into your trading account. Whenever you face a margin call, it usually means that the price of a stock has declined. Everyone knows that you do not want to sell when prices are low. If you can afford to deposit more money, you might be able to get out of this situation with a nice profit.

Take the Loss

If you fear that prices are going to continue to decline, you might want to just do nothing and take the loss. The broker is going to close out your trades in order to get you back within maintenance margin requirements.