What triggers a "margin call"?

What triggers a "margin call"?

• A. A decrease in the value of the underlying asset
• B. A requirement to maintain minimum funds due to account losses
• C. A request to withdraw funds from the trading account
• D. A notification about account inactivity

Answer: (B)

A "margin call" occurs when a trader's equity in a margin account falls below the broker's required minimum level, necessitating the need for the trader to deposit additional funds or liquidate some assets to restore the account to the required margin level. This situation is primarily triggered by losses in the trading account, which can decrease the equity available to cover outstanding positions. When a trader incurs losses that reduce their account balance, if it falls below the predetermined margin requirement set by the brokerage firm, a margin call will be issued. The call is a risk management tool used to ensure that traders maintain sufficient collateral to cover their open positions and help prevent the brokerage from incurring losses on the trader's behalf. This understanding highlights the importance of maintaining a healthy margin to avoid additional financial pressure and potential liquidation of assets to meet margin requirements.

A "margin call" occurs when a trader's equity in a margin account falls below the broker's required minimum level, necessitating the need for the trader to deposit additional funds or liquidate some assets to restore the account to the required margin level. This situation is primarily triggered by losses in the trading account, which can decrease the equity available to cover outstanding positions.

When a trader incurs losses that reduce their account balance, if it falls below the predetermined margin requirement set by the brokerage firm, a margin call will be issued. The call is a risk management tool used to ensure that traders maintain sufficient collateral to cover their open positions and help prevent the brokerage from incurring losses on the trader's behalf.

This understanding highlights the importance of maintaining a healthy margin to avoid additional financial pressure and potential liquidation of assets to meet margin requirements.