The margin call is an indicator that allows a trader to know that he has reached his maximum limit in terms of loss. Note that the alert is usually issued by the broker. At that precise moment, the trader is invited to make a payment within a specific time limit in order to ensure that the position he has previously taken can be hedged. If necessary, it must be closed and the loss in question compensated… Focus on the specificities of the margin call, its operation, its interest and its advantages
Understanding the margin call
Also known as a “margin call“, a margin call is an alert issued by a broker, letting a trader know that he is reaching a certain limit, particularly in terms of losses. When a broker activates this indicator, the investor is invited to undertake a new deposit in addition to his security deposit as soon as possible. This payment is made to the broker or clearing house (in the case of an organised market) and may take the form of cash securities.
The margin call is launched with the specific aim of preserving a position that has been opened up on the financial market. The deposit in question must be executed within a sufficiently short period of time for the position to be maintained. In general, the investor must execute (make the payment) within hours of receiving the alert, usually before a new trading day starts. In this way, it prevents its position from being closed, precisely at the moment when the market opens again (the following day).
Functioning and benefits
First of all, it should be noted that the conditions of the margin call are defined as soon as the trader registers with an online broker. The margin call then takes the form of a “loss rate” not to be exceeded and corresponding to a security deposit used precisely as compensation in case of need. When this threshold is reached, the position that would have been opened is then liquidated. Thanks to this system, the trader avoids the accumulation of losses on a futures position (these may include futures…).
This prevents him from finding himself in a situation of default when his contract expires. It should be remembered that at the end of each trading day, any position is valued on the basis of the closing price. In this way, the trader has an idea of the gains he can make and the losses he may have to bear. And above all, he knows the margin he is likely to pocket or pay to the clearing house.
If the trader is unable to pay a margin call, the broker liquidates the position. Any losses incurred by the operator are then removed from the security deposit made by the investor from the outset (usually at the time of registration).