Margin trading account definition
This situation most frequently happens as a margin trading account definition of an adverse change in the market value of the leveraged asset or contract. The broker usually has the right to change the percentage of the value of each security it will allow towards further advances to the trader, and may consequently make a margin call if the balance available falls below the amount actually utilised. From Wikipedia, the free encyclopedia. This allows the margin trading account definition to move against the margin without forcing a margin call immediately after the initial transaction. In any event, the broker will usually charge interestand other fees, on the amount drawn on the margin account.
This difference has to stay above a minimum margin requirementthe purpose of which is to protect the broker against a fall in the value of the securities to the point that the investor can no longer cover the loan. They had to deliver margin trading account definition money to their brokers or their shares would be sold. In extreme cases, certain securities may cease to qualify for margin trading; in such margin trading account definition case, the brokerage will require the trader to either fully fund their position, or to liquidate it. Brokerage houses followed suit and demanded higher margin from investors".
On instruments determined to be especially risky, however, the regulators, the exchange, or the broker may set the maintenance requirement higher than normal or equal to the initial requirement to reduce their exposure to the risk accepted by the trader. Margin trading account definition use the same example to demonstrate this:. This has the effect of magnifying any profit or loss made on margin trading account definition securities. The initial margin requirement is the amount of collateral required to open a position. The typical peak rates on brokers' loans were 40—50 percent.
The exchange calculates the loss in a worst-case scenario of the total position. Margin buying refers to the buying of securities with cash borrowed from a brokerusing the bought securities as collateral. If a margin call occurs unexpectedly, it can cause a domino effect of selling which will lead to margin trading account definition margin calls and so forth, effectively crashing an asset class or group of asset classes.
When the total value of collateral after haircuts dips below the maintenance margin requirement, the position holder must pledge additional collateral to bring their total balance after haircuts back up to or above the initial margin requirement. Financial markets Margin policy. The margin-equity ratio is a term used by speculatorsmargin trading account definition the amount of their trading capital that is being held as margin at any particular time. Similarly an investor who creates a collar has reduced risk since any loss on the call is offset by a margin trading account definition in the stock, and a large loss in the stock is offset by a gain on the put; in general, covered calls have less strict requirements than naked call writing.
If the investor fails to bring the account back into line, the broker can sell the investor's collateral securities to bring the account back into line. In terms of futures and cleared derivatives, the margin balance would refer to the total value of collateral pledged to the CCP Central Counterparty Clearing and or futures commission merchants. For margin trading account definition spread traders who have margin trading account definition futures contracts do not have to deposit collateral both for their short position and their long position.
Similarly an investor who creates a collar has reduced risk since any loss on the call is offset by a gain in the stock, and a large loss in the stock is offset by a gain on the put; in general, covered calls have less strict requirements than naked call writing. Financial markets Margin policy. For margin trading account definition film, see Margin Call film.
This has the effect of magnifying any profit or loss made on the securities. In other words, brokers required investors to put in very little of their own money. Common stock Golden share Preferred stock Restricted stock Tracking stock. Similarly an investor who creates a collar has reduced risk since any loss on the call is offset by a gain in the stock, and a large loss in the stock margin trading account definition offset by a gain on the put; in general, covered calls have less strict margin trading account definition than naked call writing. So the maintenance margin requirement uses the variables above to form a ratio that investors have to abide by in order to keep the account active.