What is a Margin Call?
When you open your BlueChip20 Account, a Loan account with EML will also be established. Your obligation to repay this Loan (including interest and fees) is secured over your BlueChip20 Account. However, your obligation to repay the principal and pay interest is not limited to the value in your Account. So, if the value in your Account is less than the amount required to meet payments to EML, then you will have to use your other funds to make the payments. Also, if at any time the sum of the principal and interest on the Loan (which is referred to as Secured Liabilities) exceeds the amount that the lender has allowed as the value at that time of your BlueChip20 Portfolio (which is referred to as Security Value) a margin call is made and the amount of the Loan must be reduced. The Security Value of your Portfolio will not be the total market value of the Shares held for you; the Security Value of your Portfolio will generally only be between 40% and 70% of the market value of the shares
A margin call is triggered when the value of the shares exceeds the LTV limit. The shares have dropped in value while the loan has remained the same producing less security for the broker who made the loan to the borrower. The borrower has a specific amount of time to pay down the loan by depositing more cash or the broker will sell shares in the open market and continue to do so until the LTV is back in line.
Buying on margin involves taking out a partial loan from one’s broker in order to cover a larger investment than one’s capital could directly cover. A margin call most often occurs when the amount of actual capital the investor has drops below a set percent of the total investment. A margin call may also be triggered if the broker changes their minimum margin requirement —- the absolute minimum percentage of the total investment that one must have in direct equity. Some examples will best demonstrate the two circumstances in which a margin call is likely to occur. Let us assume that we go through our broker to purchase $100,000 worth of stocks. We’ll say that we borrowed $50,000 from our broker on margin to purchase the stocks, and invested $50,000 of our own capital. After a particularly poor week of performance, the stock we initially invested in is now worth only $75,000. This leaves our equity at $25,000, which we can determine by taking the current value of $75,000 and deducting t
Margin calls are made when the margin requirement is breached. As an example: £10,000 is being used to control a long position in Barclays worth £30,000, which was bought at 315p and which gives a value to the trade of £94,500. Barclays has a 10% margin requirement, this means that nearly the entire available margin is being used with just £450 spare. If Barclays dropped by just 2p this would create an unrealised loss of £600 pounds which would upon being marked to market create a margin call. Cleared funds must then be deposited, or the position may be closed irrespective of the client’s view, with the loss being debited to the client’s deposit. It is always advisable to leave plenty of margin available so as to avoid the likelihood of margin calls.
In the stock world, many experienced investors opt to buy some stocks on margin. Buying stocks on margin is an attractive option for investors as it allows them the opportunity to double their return. When an investor buys stocks on margin, he pays for a fraction of the stock, usually around 50% (but it cannot go beyond this), and then borrows the rest from his broker. Buying stocks on margin can result in a large return when the stock goes up and allows you to purchase more stocks by using the assets you already have as collateral for the loan. In addition, it also lets you to react quickly to new investment opportunities because you have the added money in your account. Buying on margin works something like this- First, your broker will set you up with a margin account. Let’s say you put $5,000 in it. That gives you $10,000 of buying power, since you can borrow up to 50%. If you decided to spend $4,000 on a certain stock, that would leave you with $6,000 worth of buying power – $1,00
