Margin Call? No Drama!

When your broker makes a margin call, it means you have a short amount of time to make your equity once again meet the minimum maintenance margin

If you spend enough time dabbling in the world of trading, stock markets and shares, you will come across the term “margin call”, uttered in hushed tones with an air of trepidation. But what exactly does it mean? This piece of writing will explain margin calls, their raison d’être, and how they might be of use in the crypto-industry.

What is a margin call?

You are considering buying shares in a company but need some financial assistance to buy the quantity you want. Naturally, you find a broker willing to lend you the money you need to complete your investment, and the shiny new shares form the collateral in the loan should something go awry. This is known as a “margin loan”, which may be subject to interest depending on the lender. You now have equity in the investment, which is calculated by subtracting the money lent to you from the market worth of your securities, and which must legally equate to min 25% of their worth, called the “maintenance margin”. The maintenance margin may also vary depending on the lender.

Ideally, your investment is sound, the value of your assets soars and you are happy with the money it is generating. If you are lucky, you are able to repay your borrowed funds sooner than you expected.

Let’s assume the market value of the company in which you have bought shares dips and your equity falls to less than 25% of your shares’ current worth: what happens then? Your broker will make a margin call, meaning that you have a short amount of time to make your equity once again meet the minimum maintenance margin.

The gap between these two figures can be bridged either by depositing the requisite amount of funds into your account, or by giving the lender more securities in the form of shares or properties. If this does not happen in due course, your broker can seize and liquidate the assets they have helped you procure up to the point that their loan has been paid back in full.

What is the purpose?

Margin calls act as an insurance policy for brokers who lend money for investment and want to protect themselves from the possibility of the investor defaulting on their loan if their investment depreciates.

Margin calls in crypto trading

In case of margin trading, the model that exists in the financial world can be applied to the crypto-universe. Investors can supplement their own money with borrowed funds to buy and trade cryptocurrency on an exchange, strengthening their buying power. This form of margin loan is firmly in the arena of high risk-high reward leveraging, as the loan has to be paid back to the broker regardless of the investment’s success, but the volatility of cryptocurrencies represents fertile ground for asset growth if the gamble is shrewd.

Should the equity nosedive, it is important that the investor has enough funds to cover any potential difference between equity and the minimum maintenance requirement, as these will be demanded in a margin call and can be contributed in fiat or cryptocurrency. If the deposit is not forthcoming, the exchange will liquidate the assets, though some platforms are more careful, tailoring the process according to the risk of the deal, blocking pending orders in the loan contract and only partially liquidating assets if possible to prevent manipulation of cryptomarkets.

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