Margin Call Definition with Example
Margin Call Definition – It refers to the demand made by the brokerage firm to deposit a certain amount of sum in the marginal account to maintain the minimum balance.
In simple words, when the margin account balance becomes less than the minimum amount of the balance that an investors needs to keep in the margin account, the investor broker ask the investor to refill the gap. Its the call of the investor whether he wants o deposit the money in the account or want to sell of the securities.
The situation of Margin call arises when investor take loan from his or her broker to buy a security. This is known as buying stock on Margin. For margin trading, marginal account is required. In order to keep marginal account, investor is require to deposit a certain sum of money in this account. This balance is known as minimum maintenance margin. Now, here comes the role of call on margin. If the amount in minimum maintenance margin decreases, then the broker make a call to investor to refill the gap and maintain the required maintenance margin.
Margin Call Example
Let’s say, you want to buy 100 shares of ABC Ltd costing Rs. 1,00,000. However, you have only Rs. 50,000 with yourself. So you decide on buying on margin. For the rest 50,000 rupees, you take loan from the brokerage firm you are registered with. ‘
Now, suppose you were expecting rise in prices but the share price falls. And hence the balance in your margin account reduces below the maintenance margin.
Now, your brokerage firm will make a margin call to deposit a sum of money or the security so that the balance in your margin account again touch the maintenance margin. The main purpose of making this call is to reduce the default risk in case you are unable to repay the loan.
Importance of Margin Call
Margin trading allow the investor to make investments more than the money they have. It allows the investors to take loans from their brokers and magnify their gains. However, there is risk as well. If the investor is unable to fulfil the maintenance margin, then broker can either sell your shares or even sue you. Marginal Trading is for those investors who are knowledgeable and sophisticated.