How Does Margin Call in Stock Margin Trading Work

Margin trading is more than buying and selling stocks when investors leverage their market positions with cash or security. When you are initially starting out in the stock market, you should keep your exposure to a minimum. 

By creating a brokerage account with one of the numerous brokerage firms, you may begin buying and selling stocks on your own. You must request that your brokerage firm begin this margin transaction in your trading account. Your margin trading transactions are funded by your stock broker.

What is Margin Call in Trading?

Margin calls are requests for extra funds or securities to bring a margin account’s minimum maintenance margin up to the required level. If a trader fails to deposit cash, the broker may force the trader to sell assets regardless of market price to fulfil the margin call.

Buying stocks on margin entails borrowing money to purchase them.

If you acquire stocks outright, you’ll have to pay?

For 100 shares of a stock worth ₹50 each, you’ll have to pay ₹5,000. They are yours to keep. You have already paid for them in full.

When you buy on margin, though, you are borrowing money to buy the stock. You don’t have ₹5,000, for example, to buy those 100 shares. A brokerage business might be able to lend you up to 50% of that amount to buy the stock. To purchase 100 shares of stock, all you need is ₹2,500.

Check out: What is the difference between a margin call and a margin call in futures trading?

The majority of brokerage houses require a minimum of ₹10,000 in equity. This implies that you must invest at least ₹10,000 in stock purchases.

You pay interest in exchange for the loan. The brokerage is profiting from your loan. They will also use your shares as a form of security for the loan. They will grab the stock if you default. The deal carries relatively little risk for them.

Buying on margin is sometimes compared to purchasing a property with a mortgage. You are taking out the loan in the hopes of increasing the value of your property and profiting. You now have authority over twice as many shares. All you have to do is look at the increased profit and compare it to the brokerage interest you paid.

Buying stock on margin, however, comes with its own set of hazards. The value of your stock has the potential to fall at any time. The brokerage is prohibited by law from allowing the collateral value (the price of your shares) to fall below a specified percentage of the loan value. The brokerage will issue a margin call on your stock if the stock falls below that defined amount. If you’re new to trading, you should look into free stock trading classes for beginners to learn the fundamentals of interacting with a brokerage firm.

The term “margin call” refers to the requirement that you pay the brokerage the amount required to reduce the brokerage’s risk to the permitted level. If you don’t have enough money to repay the loan, your stock will be sold. You will be sent any remaining funds if there are any. After the stock is sold, you will usually have very little of your original investment left.

Buying on margin could result in a massive profit. However, you run the danger of losing your initial investment. There are dangers with each stock transaction, but the risk is amplified when utilizing borrowed funds.

How to Remove Margin Call Possibility?

  • Never deal with borrowed money.
  •  Maintain a cash reserve in your account. Instead of putting all of the money into financial goods, the investor might put some money away in cash to prevent margin calls.
  • Prepare for the unexpected.
  • Invest in assets with a high rate of return.
  • Make on-time payments. 
  • Set a minimum investment amount for an investor.

Explore more: what is daily margin statement and how to read it

For the average investor or newbie, buying on margin is usually not a wise idea. It’s a problem that even the most seasoned investors face. The stakes are really high. Make sure you are aware of all of the possible outcomes, both positive and negative.