Margin Call in Simple Words: Details and Risks. (Part 3)

What to do in case of a margin call

Regardless of the type of trade, the assets you use, your strategy, or your broker's trading conditions, there is one factor that cannot be completely eliminated. It is a risk. In margin trading, the risk is directly related to the situation when a margin call occurs. But it is not dangerous to encounter a margin call, it is dangerous to react incorrectly. Below we provide an algorithm for three possible reactions.

To deposit funds.
The most obvious reaction is to deposit the necessary amount to establish or exceed the required percentage of equity. Note that the trading conditions and the notification itself specify the period in which you need to deposit funds into your account. It does not have to be done immediately, but it is better not to delay (and be sure to take into account in your calculations the period it will take to deposit funds into the account if they do not come immediately).

In the event that you for some reason do not deposit the required amount, the broker will have the right to sell your securities at his discretion, without prior notice. But understand the broker - he does not want to lose his own money if the value of the assets continues to decline rapidly.

Close a position.
It is a matter of liquidating one or more open positions by selling securities and thereby replenishing your deposit. This approach with a margin call can be a profitable alternative to funding your account. Perhaps some positions are unprofitable and should have been closed long ago. Often it is even technically easier and faster to sell a few shares than to deposit additional funds into a trading account.

Contribute stock.
This is a rarer alternative, which boils down to depositing not funds, but securities (such as stocks). Not all brokers allow doing so. This option is quite actual if you have difficulties with free funds, but have securities. It is worth noting that with most brokers it takes a long time to deposit shares into an account, so you need to contact technical support and make sure that the shares will arrive before the expiration of the margin call.

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Follow our updates for useful information in our series of articles. You can also visit our previous article for a better understanding of this topic.