Hello, this is Capital Cat! Let's explain the risks by situation regarding margin calls. A margin call is part of the system used in margin trading and occurs when the market value of the positions an investor holds falls below the margin balance.

Basics of Margin Call

A margin call is when the margin in a trading account falls below the required margin (maintenance margin), and the broker asks the investor to deposit additional funds into the account. When this occurs, the investor must add funds within the specified period. If the margin call is not met, there is a risk that the positions will be forcibly liquidated.

Explanations by Investment Instrument/Type

1. Stock margin trading

Overview: Stock margin trading is a transaction in which an investor borrows funds from a securities company to buy stocks. In this trading, investors can hold large positions with relatively little capital, and using leverage is common.
Margin Call: When stock prices fall and the margin balance falls below the maintenance margin set by the securities company, you will be asked to deposit additional funds. This is a margin call. If you do not respond, the stocks you hold may be forcibly sold.

2. Stock collateral

Overview: Stock collateral involves borrowing funds by using held stocks as collateral. In this method, even if the collateral stocks drop in value, additional collateral is generally not required, but the creditworthiness of the loan repayment ability may decrease.
Margin Call: In the case of stock collateral, even if the collateral value declines due to stock price fluctuations, an additional collateral request is usually less likely, but in extreme market fluctuations, additional collateral may be required as part of risk management.

3. Margin Call for FX and CFDs

Overview: In FX (foreign exchange trading) and CFDs (contract for difference), leverage is used when trading currency pairs or other financial instruments. This allows large trades with a small amount of margin.
Margin Call: If the price of the traded instrument moves unfavorably, the account’s margin balance may fall below the required margin. In this case, the broker triggers a margin call and asks the investor to deposit additional funds. If additional funds are not provided, the positions held may be forcibly closed.

Risk Explanations by Situation

1. Sudden market price fluctuations

Risk: When market prices move rapidly, especially with high leverage, there is a possibility that the margin balance falls below the required margin in a short period.
Measures: Use lower leverage, set stop-loss orders, and continuously monitor market trends.

2. Persistent loss expansion

Risk: If the opened positions continue to incur losses, the margin balance will rapidly decrease, increasing the risk of a margin call.
Measures: Set loss-cutting rules to limit losses and diversify investments.

3. High-volatility markets

Risk: In markets with high volatility, large price movements occur frequently, and margin calls may occur more often.
Measures: Reduce trading volume and prioritize trading in markets with lower volatility.

4. Currency pair risk

Risk: Some currency pairs may be riskier than others. For example, emerging market currencies can be highly risky due to political instability and economic fluctuations.
Measures: Be careful when selecting currency pairs and evaluate currency pair risks in advance.

Debt Repayment Obligation Due to Margin Calls

Responding to a margin call by depositing additional funds is basically the customer’s obligation. This additional capital is used to cover losses incurred in trading. If you do not deposit additional funds, the broker can forcibly settle your positions, and you will bear the resulting losses.

Legal Repayment Obligations and Bankruptcy

Based on contracts with the securities company or broker, it is often a legal obligation to deposit additional funds in response to a margin call. If the losses arising from not meeting a margin call exceed the margin, the difference effectively becomes a debt that the customer must repay.Bankruptcy is a process to petition a court to be relieved of debt repayment obligations.If you are losing so much in stock trading that you cannot pay the margin call, you might consider bankruptcy. However, debt from stock trading typically falls under disqualifications for discharge, so it is highly likely to become a bankruptcy case, so proceed with caution.

Margin calls will be an “undischarged discharge-grounds

Summary

Margin calls can pose significant risks, especially in leveraged trading. With a proper risk management strategy, you can avoid such situations. When planning an investment strategy, it is important to properly assess the risk of margin calls and take measures according to the situation. If you have questions or need more information, please feel free to contact us anytime!

Capital Cat

What is a margin call (追証)