What is a Margin Call?

Bittime - In the world of trading, the term "margin call" is often a frightening prospect for traders. A margin call occurs when the equity value in a trading account falls below the minimum margin requirement. This article will thoroughly examine what a margin call is, how it works, and how traders can manage it to avoid large losses.

What's that Margin Call

A margin call is a request from a broker to a trader to add funds or sell assets in a trading account to meet minimum margin requirements. Margin itself is money borrowed from a broker that is used to invest an amount greater than the funds actually owned by the trader. A margin call occurs when the market value of the borrowed asset experiences a significant decline, so that the trading account equity becomes less than the predetermined margin requirement.

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Example of Margin Call

For example, a trader opens a margin account with $10,000 and uses 2:1 leverage to buy $20,000 worth of shares. If the value of the stock falls to only $12,000, the trader's equity will fall to $2,000 ($12,000 minus the $10,000 loan). If the minimum margin requirement is 25%, traders need to have at least $3,000 equity in the account. In this situation, the broker will issue a margin call, asking the trader to add $1,000 or sell some assets to meet margin requirements.

How Margin Calls Work

The margin call process begins when a trading account reaches the maintenance margin level, which is the minimum level of equity that must be maintained in the account. When the value of assets in the account decreases and approaches the maintenance margin level, the broker will provide a warning to traders. If the asset value continues to decline and equity falls below this level, the broker will issue a margin call.

Traders then have several options:

Adding Funds

Traders can add funds to the account to increase equity and meet margin requirements.

Selling Assets

Traders can sell some of the assets in the account to reduce loans and increase equity.

Does not do anything

If a trader does not respond to a margin call, the broker reserves the right to automatically sell assets in the account to meet margin requirements.

Impact of Margin Calls

Margin calls have several significant impacts for traders:

Financial Loss

If a trader cannot meet a margin call, the broker may sell the asset at a low price, causing huge losses.

Psychological

Margin calls can cause significant psychological stress for traders, which can affect their future trading decisions.

Trading Limitations

After experiencing a margin call, a trader may face limitations in trading on margin in the future, as the broker may increase margin requirements or reduce available leverage.

Managing and Avoiding Margin Calls

There are several strategies traders can implement to manage and avoid margin calls:

Using Leverage Wisely

Using lower leverage can reduce the risk of margin calls. Traders should ensure that they only borrow funds in amounts they can afford to replace.

Monitor Accounts Regularly

Traders should regularly monitor the value of assets and equities in their accounts to avoid surprise margin calls.

Portfolio Diversification

Diversifying investments can help reduce the risk of significant decline in asset values.

Stop-Loss Orders

Using stop-loss orders can help limit losses and prevent asset values ​​from falling too far.

Saving Fund Proposals

Having reserve funds outside the trading account can help traders meet margin calls without having to sell assets.

Margin Call in Crypto Trading

In the context of crypto trading, margin calls work the same way as in stock or forex trading. However, the high volatility of the crypto market makes the risk of margin calls greater. Therefore, it is important for crypto traders to understand how leverage and margin work and monitor their positions closely. Crypto brokers typically offer a variety of risk management tools, such as stop-loss orders and margin level alerts, to help traders manage their risks.

Factors that Influence the Occurrence of Margin Calls

Market Volatility

Sharp price fluctuations can quickly erode account equity, triggering margin calls.

High Leverage

The higher the leverage used, the greater the risk of margin calls.

Economic and Political Conditions

Global events such as financial crises, wars, or changes in monetary policy can affect asset prices and increase the risk of margin calls.

Poor Asset Performance

A drop in the price of a traded asset can immediately lead to a margin call if there is not enough equity to cover the loss.

Why Do Brokers Issue Margin Calls?

Brokers issue margin calls to protect themselves and traders from unbearable losses. By asking traders to add funds or sell assets, the broker ensures that there is enough equity in the account to cover the loan that has been provided. This helps prevent situations where traders are unable to fulfill their obligations, which could lead to financial losses for the broker.

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Conclusion

A margin call is a mechanism used by brokers to ensure that traders meet minimum margin requirements. Although margin calls can cause huge losses and psychological stress, traders can manage them wisely through the right strategy. By understanding how margin calls work and implementing good risk management, traders can reduce risk and maintain the stability of their trading accounts.

How to Buy Crypto on Bittime

You can buy and sell crypto assets easily and safely via Bittime. Bittime is one of the best crypto applications in Indonesia which is officially registered with Bappebti. 

To be able to buy crypto assets on Bittime, make sure you have registered and completed identity verification. Apart from that, also ensure you have sufficient balance by depositing some funds into your wallet. For your information, the minimum purchase of assets on Bittime is IDR 10,000. After that, you can purchase crypto assets in the application. Study Complete Guide How to Buy Crypto on Bittime. 

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