Trading on margins is when you provide your financial institution with collateral in the form of your current assets. You are securing the fact that you will most likely have to borrow from them in the near future, which can become risky since all of your most beloved and valued assets will be at stake. If you do not compensate them for your margin trade in time, they have the right to sell off any of your related assets.
- To buy stock on margin, you pledge collateral to your broker in exchange for a loan, but if your collateral is insufficient, you are liable for the difference.
- A margin call occurs when your account falls below the level of collateral you need, and your broker demands that you deposit additional funds or sell assets to fix this.
- Both the government and individual brokerages have policies about how much equity you must have in relation to what you’ve bought on margin.
“One of the most unpleasant experiences an investor, trader, or speculator might face in his or her lifetime is known as a margin call.”