What Is a Margin Call and How Can You Avoid the Risks?

Recent significant market drops have caused some Tigers to reach High risk levels. This guide aims to explain margin call.

Margin trading can be a powerful tool for investors, allowing them to borrow funds to increase their purchasing power. However, it also comes with significant risks, particularly the possibility of a margin call. Here’s what you need to know about margin calls and how to manage the associated risks.

What Is a Margin Call?

A margin call occurs when the value of an investor's margin account falls below the broker's required minimum value. This is usually triggered when the securities purchased on margin decrease in value. Essentially, a margin call is the broker's demand that the investor deposits more money or sells off assets to bring the account back up to the minimum value​.

How Does Margin Trading Work?

Margin trading involves borrowing money from a brokerage to buy more securities than you could with your available funds. When you open a margin account, you agree to maintain a minimum amount of equity in the account. This is typically set by regulatory bodies like the Federal Reserve Board, FINRA, and the NYSE.

There are two primary types of margin requirements:

1. Initial Margin Requirement: When you first purchase securities on margin, you must meet an initial requirement, usually 50% of the total purchase price.

2. Maintenance Margin Requirement: After the purchase, you must maintain a minimum level of equity, generally at least 25% of the total market value of the securities in your margin account.

How to monitor your risk level？

You can monitor your risk level in the Tiger Trade app click Trade > Excess Liquidity

Risk levels can be categorized into six levels: Very Safe, Safe, Moderate, Alert, At Risk, and High Risk.

What Triggers a Margin Call?

Several scenarios can trigger a margin call:

1. Risk Level Below Zero: When the account's risk level drops below zero.

2. Recalled Borrowed Stocks: When borrowed stocks for short selling are recalled by the lender.

3. Over-Leverage: Using too much leverage can amplify losses and increase the likelihood of a margin call if the market moves against your position​

4. Instant Margin Deficiency: Margin drops below $2000 during margin trading.

5. Increased Margin Requirements: Brokers or regulatory bodies may increase margin requirements, especially during volatile market conditions. If you do not meet these new requirements, you could face a margin call.

How to Avoid Margin Calls

To mitigate the risk of a margin call, consider the following strategies:

1. Monitor Your Account Regularly: Keep a close watch on the value of your investments and your margin balance to ensure you are not approaching the maintenance margin requirement.

2. Use Stop-Loss Orders: Implementing stop-loss orders can automatically sell your securities at a predetermined price, helping to limit losses and maintain adequate equity in your margin account.

3. Maintain Extra Equity: By keeping more equity in your margin account than the minimum required, you create a buffer that can protect against sudden market swings.

4. Diversify Your Portfolio: Diversifying your investments can reduce the risk of large losses in any single security, thereby decreasing the likelihood of a margin call.

5. Be Cautious with Leverage: Avoid over-leveraging your account. Using too much borrowed money can lead to significant losses if the market moves against you​. $Tiger Brokers(TIGR)$