A margin call can be defined as a broker’s demand on an investor to use margin to deposit more securities or money. This is done to bring the margin account up to the minimum maintenance margin.
Margin calls are the result of a lower account value based on a broker’s specific formula. So if an investor bought one or more securities with borrowed money and its value diminishes, the broker will make that call.
At this juncture, the investor must either sell off some of the assets or deposit more money.
Investors sometimes borrow money from a broker to make an investment. So when an investor uses the margin to either buy or sell securities, the investor has to pay for them using a combination of own funds and funds borrowed from a broker.
When time is of the essence, this can be a huge advantage.
What’s known as leverage through margin enables investors to pay less than the whole cost of a trade. This means that there will be larger-sized trades than funds in the account to enable more purchasing power.
In general, the most leverage is allowed in forex trading. Then you have futures and equities (in that order).
The risk associated with an investment is known as exposure. It’s the money that an investor stands to lose if an investment doesn’t go according to plan.
This is calculated by two risk measurements to estimate the financial risk and market exposure:
EPR can be defined as the worst single-day movement of a security that includes historical price data that covers three to five years. Further, it should also include big momentum event days like debt ceiling crisis and the flash crash.
By using EPR, investors can figure out if their portfolio has enough to absorb outlier moves or tail risks.
PNR, on the other hand, includes losses from a single position compared to investor equity. Ideally, the expected price range must always be above the point of no return.The bottom line is if you don’t want to get a margin call, you can follow these two risk measurement to prepare yourself. By making sure