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4 ways to avoid owing money to your brokerage firm
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A margin call occurs when the value of your brokerage account falls below a certain level. This level is known as the margin requirement and means that the investor is required to deposit more money into the account, sell off some of the investments, or add more marginable assets if reached.To get more news about margin call, you can visit wikifx.com official website.
"The best way to describe a margin call is that you owe your investment platform or brokerage money," says Robert Farrington, founder of The College Investor.
Within the context of investing, margin is the practice of taking a loan from the brokerage firm for the purpose of buying stocks and other assets. Margin can increase the buying power for an investor by allowing them to make larger investments and higher potential profits. "Margin is an incredible tool to provide investors with access to additional capital," says Dr. Hans Boateng, founder of The Investing Tutor. "It works wonders in an upward market. It becomes dangerous in a downward market if you don't have savings in the event of a margin call."
There are three main types of margin calls: maintenance margin calls, Regulation T calls, and minimum equity calls. Each of these margin calls can be triggered for different reasons. Here's a breakdown of each below.Maintenance margin call: A maintenance margin call refers to the margin requirement to stay in a position. Once you have met the initial margin requirement of 50%, the Financial Industry Regulatory Authority (FINRA) requires that brokerages set a maintenance requirement of at least 25% for the remainder of the trade and allow brokerages to be even more restrictive. This is sometimes known as the "house requirement" and most brokerages set their maintenance requirements between 30 to 40%.
Let's use an example where you have $10,000 invested in company ABC: If your brokerage sets the maintenance margin requirement at 25%, it means that the equity in your account must not fall below $2,500.
Remember, a margin account will consist of the equity, which is the amount of cash you have plus the amount that was loaned to you. Therefore, the total account balance would have to be $7,500 to receive a margin call ($5,000 margin loan + $2,500 remaining equity) because the value of the loan has not changed.Regulation T call: This type of call refers to the requirements needed to begin a margin trade and can occur when an investor makes a transaction in a margin account without meeting the initial 50% minimum equity requirement. This is sometimes referred to as a Fed Call.
Minimum equity call: This is the lowest amount needed to open and maintain a margin account. This call — sometimes known as an exchange call — occurs when the account balance falls below $2,000 in equity. If you're classified as a pattern day trader, this requirement is $25,000.
How to avoid margin calls
You're not required to have a margin account, and you could easily avoid margin calls by only trading with cash. "The best way to avoid a margin call is to simply not use all your margin limit," says Farrington. Margin is not needed to achieve solid, consistent returns over time, but for those that choose to use it, here are a few things you can do to avoid a margin call:
The bottom line
Using margin in an investing account can help increase gains, but it can also magnify losses. It's important to make sure you're properly managing your risk. "There are really few reasons to use margin," adds Farrington. "It should only be used by experienced investors who have a specific plan and purpose for doing it. Maybe you're investing today while waiting for that ACH deposit next week. Or maybe you're executing a certain options strategy. But you need to have a specific plan."