If you’ve been a fan of Hollywood then you might’ve been introduced by the word “Margin Call” long before you find it in the real trade market. J.C. Chandor has adopted Rahm Emanuel’s philosophy that “a severe crisis should never go to waste.” The 37-year-old writer and director utilized the financial crisis as inspiration for the most in-depth Wall Street film ever made. Margin Call depicts a day in the lives of a Lehman Brothers-style bank as it tries to avoid falling victim to the financial crisis’ early cracks. The film, which is fast-paced and well-acted, shows how huge financial institutions operate and the motivations of those who work there.
In this article, we’ll be going through what Margin Call is and how it works.
Understanding Margin Call
When the value of an investor’s margin account falls below the broker’s required amount, a margin call happens. Assets purchased using borrowed money (usually a combination of the investor’s own money and money borrowed from the investor’s broker) are held in a margin account. A margin call is when a broker requests that an investor deposit more money or securities into their account in order to bring it up to the maintenance margin, which is the minimum value.
A margin call usually means that the value of one or more of the securities in the margin account has dropped. When a margin call happens, the investor must decide whether to add more money to their account or sell part of their assets.
What is Margin Call in Forex trading?
Margin Call is a notification that informs you that you need to deposit extra funds into your trading account or terminate lost positions to free up more margin. It’s expressed as a fixed percentage that’s set by your broker and can be found in your trading account’s Account Specifications. Your margin level drops as the market swings against your open holdings. You can expect a Margin Call notification in your Terminal once the margin reaches the Margin Call. Margin Calls, to put it another way, alert traders when the Stop Out level is approaching.
Can I Trade Forex Without Margin?
Yes, you can trade forex using simply the funds in your trading account and without using leverage. Since you’d have less money under your control, the prospective gains and losses would be fewer.
Trading without margin is done by:
- Traders with trading account balances of $100,000 or more.
- Those who want to get additional market and strategy experience without risking their entire investment.
- People who aren’t dependent on making a living from forex and wish to limit their risk.
Margin Call Real-life Example
Let’s say you buy $100,000 of Tesla, you fund $50,000, and the rest of the $50,000 you borrowed from your broker. You’ll see that your broker has a maintenance margin of 25%. At the time of purchase, your equity as a percentage of 50%.
Your equity is calculated using the following formula.
Your Equity As Percentage = (Market Value of Securities – Borrowed Funds) / Market Value of Securities.
So, in our example: ($100,000 – $50,000) / ($100,000) = 50%.