What is the Call Margin in stocks? This is a common question for most investors, especially those who have been participating in margin trading. To better understand this term Learn Forex Trading will share details in the article below.
What is the Call Margin in stocks?
Margin or margin trading means allowing investors to borrow money from securities companies. From there, investors use that loan money to buy shares and use those purchased shares as collateral. What is the Call Margin in stocks and forex? This is the term when securities companies issue notices to people using the Margin margin trading service in some specific cases.
The Call Margin ratio is not the same, it depends on the policy of each securities company. When it happens that the real value of the total value of securities is lower than the specified fund ratio, the company will conduct a Call Margin. At this time, the system will automatically notify investors through email and text messages via phone. From there, investors will confirm information promptly.
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How to calculate Margin Call in stocks?
The Margin Call ratio of each securities company will have its regulations. The following is a guide for investors to know how to calculate and determine when the Call Margin phenomenon will occur.
We temporarily call A the current stock value, and B the loan amount of Margin. When the market tends to decrease, A will decrease and lead to a decrease in the margin-margin ratio. Because this ratio is calculated by the value of both A and B. We will call the Margin Call ratio of a company C. If the A/B ratio < C, immediately 2 cases will happen as follows:
- Case 1: Investors must pay additional money.
(A+additional payment amount)/ (B+additional payment amount) > C
- Case 2: Investors need to sell shares.
(A + number of shares * price)/B >Z
Example of call margin in stocks
Below we will give a specific example for you to understand what a call margin is in stocks and forex.
For example: You have 400 000 USD, but you want to buy shares worth 200 000 USD. To be able to buy those shares, you borrow Margin at a ratio of 1:2 at a securities company. Since each share costs 100 USD, you will have 2000 shares. The securities company announced the Call Margin rate of 30%.
After a while, the number of shares you own decreases in value by 30% to only 140 000 USD. When subtracting the Margin margin transaction, you only have 40 million left. At this time, your real assets are 40/140, which is 28.5%, a value less than 30%.
When Call Margin is forced to occur, there will be 2 cases as mentioned above. You must pay more money or sell a certain amount of shares to reach a higher threshold than the Call Margin ratio. At this point, there are two ways to solve it as follows.
- Method 1: You need to pay an additional amount of at least 3 million USD.
- Method 2: You need to sell at least 20 shares.
To avoid Call Margin, you need to choose to deposit an additional 3 million or sell 20 shares.
What is the call margin in stocks? When does it take place?
When the Margin ratio in securities is less than the required level. You cannot actively increase the stock ratio. You need to bring assets to the safe threshold according to the handling instructions set out by the securities company. At that time, the securities company will contact you and inform you that your account is under Call Margin. So how to know when your account has a Call Margin? You need to clearly understand what the concept of Call Margin is in stocks. At the same time, you can refer to the following content.
The time when the Call Margin takes place
When the stock market fluctuates and changes prices, investors buy poor-quality securities. Or the company has a loss-making business plan that reduces profits dividends, and interest rate risks… These things will cause stock prices to fall deeply. Market declines also have an impact on stock prices. Margin ratio can decide whether or not investors can hold on when the market is plummeting.
Besides, investors also need to think carefully before choosing to use Margin. Because if you lack investment experience, you should not borrow Margin. Because it has many potential risks, it is very difficult for you to grasp or control. In addition, margin lending will create a passive situation. When a Call Margin occurs, the decision depends entirely on the securities company.
In case you do not promptly add more money to the collateral. The system will automatically use your shares as collateral. And put it into mortgage sale if necessary. At that time, you may suffer heavy losses or lose all of your shares.
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How to limit Call Margin situations in stocks
No one does not want to minimize risks and increase profits when investing. And one of the ways to do that is to avoid the Call Margin situation. Below we will show investors a few principles to limit that situation from happening.
It is necessary to keep a reasonable ratio of cash in the account
Once you understand what Call Margin is in stocks and forex, you need to avoid it from happening. First, you must balance the ratio of cash and stocks. With the amount of cash you have, you will limit the occurrence of Call Margin. Not only that but this cash can also be used to buy potential stocks when needed.
If the stock market increases, investors should keep the ratio of cash and stocks at 30/70. Of which cash accounts for 30% and stocks account for 70% of the account. Even 20/80 is fine. This will help you minimize Call Margin when the stock drops.
Remember to diversify your investment portfolio
Never put all your money into one stock like you put your eggs in one basket. That is the experience of good investors. You should divide your capital into parts and invest in many different types of stocks. This will make it difficult for you to suffer heavy losses. Because unfortunately one type decreases but the other increases, you can break even or make a profit.
Many investors believe that stock prices will increase again when the future ahead does not have much hope. This causes investors’ stock prices to drop day by day without knowing what to do. Sometimes even empty-handed after a few transactions. So, remember and follow the stop-loss principles. If you follow the growth style, remember to set your stop loss at -8% and look for other investment opportunities.
Epilogue
Learn Forex Trading has shared information about what Call Margin is in stocks and forex. And how to handle when you accidentally get a Call Margin. In addition, to trade smoothly, you can also learn more about a lot forex. We have gathered the above knowledge from practical experience after a long time of stock trading. Hope the article is useful and brings you a success rate in stock investing. Please follow Self-study Forex to gain more useful knowledge.
