To understand what a margin call is, you have to know what it means to trade on margin.
Sometimes referred to as ‘leveraged trading’ or just ‘leverage’, trading on margin is when you trade using borrowed money. Doing this allows investors to buy much more of a particular asset than they would otherwise be able to.
The money they use is usually borrowed from a broker. In order to borrow, investors have to put down some of their own cash or other assets as a form of collateral. This collateral is known as ‘margin’.
The reason a broker asks for margin is so that they don’t lose the money that they’ve lent you to trade with.
So if the asset you have invested in using borrowed money loses the value of the margin you put down, the broker will ask you to give them more cash or assets as margin. If you don’t do this, the broker will liquidate the position in an effort to make sure they don’t end up losing money.
Imagine you have a broker that lets you trade on margin of 25 per cent. That means you have to put down a minimum of 25 per cent of the value of the trade that you are going to make.
Using this broker, you buy some shares worth £1,000. You put down £500 as margin and the broker lends you £500.
Unfortunately for you, those shares fall in value to £600. That means the broker’s original £500 is still there but you now only have £100 in the trade.
In percentage terms, that means you also now only have ⅙ - 16.66 per cent - as margin. This is below the margin level required to keep the trade open.
To keep the trade open, you would have to deposit assets or cash that would bring your margin back up to the 25 per cent level that the broker requires. If you fail to do that then broker will liquidate your position and recoup the money that they lent to you.
The money you pay when investing.
The amount of money a company would be left with by subtracting its liabilities from the value of its assets.
An exchange-traded fund that is comprised of a set of stocks.
A collection of investments, pooled into a single fund that can be bought and sold on a stock exchange.
An investment that provides a fixed rate of return, often over a specific set of time.
The data or information that is likely to impact a company's stock price.
The other free trade. International trade in which countries allow goods to flow across their borders without imposing import or export taxes.
A way of calculating compound returns on an investment or savings over a set period of time.
A set of standards which investors use to present their investment results.
The difference between a company's revenue and the cost to produce its goods/services, divided by revenue.
Investment funds that are often associated with riskier and shorter-term trading strategies.
The amount of money generated by an asset during the time that it was held by an investor..
A mathematical test used to determine whether a claim is true or false.
A summary of a company's income and expenses over a set period of time.
The increase in the prices of goods and services over time, and the process by which money loses its value.
The amount a lender charges for lending your money, or a borrower pays you for borrowing your money.
A means of calculating the potential future return on an investment.
The amount of money made or lost from an investment. Usually expressed as a percentage.
A company that pools money together from multiple investors and then invests it.
A form of debt investment that carries higher risk because of the likelihood that the issuer will default.
A document issued by an investment fund to help investors determine if it's the right fund for them.
A legal requirement for financial firms to understand exactly who their customers are. Used to prevent money laundering and terrorist financing.
A method of trading using borrowed money that usually involves a very high level of risk.
London Stock Exchange, which was founded in 1571 and now has a market cap of almost $5 trillion.
Unique to the UK, these funds pool together money to invest from multiple investors.
A situation in which a market or industry is controlled by a small group of companies.
A security that is sold outside of an exchange.
An investment where, regardless of its legal form, the amount repayable to the retail investor is subject to fluctuations.
A form of fraud designed to lure new investors, and pays the earlier backers by using the new investors' money.
An investor that is able to meet several regulatory criteria.
A statement that summarises firm's expenses, costs, and revenues incurred during a time period. AKA income statement.
Profit on an investment, expressed as a percentage of the investment.
An investment trust specialised in investing in commercial property such as parking garages or GP offices.
Bonds and stocks.
The currency exchange rate a bank quotes, valid with immediate effect.
A physical/digital place where stockbrokers and traders can buy and sell securities.
A place where shares of publicly listed companies are traded.
Examining price movements of shares and other assets, and trying to predict how they will move in the future.
The concept that money you have now is more valuable than the same sum in the future.
A return calculated over the time period invested, that excludes extraneous elements, such as deposits to and withdrawals from the investment accounted.
The return that includes everything: interest, capital gains, dividends and distributions realised over a time period.
A startup valued at over £1 billion. They are rare, hence the name.
The famous greenback our friends in the US use as currency.
A collective investment scheme the investors pay money into in exchange for units. The money is invested in a diversified portfolio of assets.
The art of buying shares which trade below their value, according to the analysis of the value investor.
A listed company run by a fund manager, investing mainly in private companies.e.
A type of financing that investors provide to startups, who sometimes announce getting said financing in TechCrunch, to big fanfare.
A measure of how much the prices of an asset or index vary over time.
Non-US individuals and businesses may have to file this form for the Internal Revenue Service (IRS), the US tax authority.
A street in New York that became a figure of speech for the financial markets of the US.
A tax deduction made at the source of the payment.
A period of time that starts with the first day of the current calendar year and ends with today.
Income from an investment as a percentage of its current price.
A bond that pays no interest at all. Read on to see how that can make sense for an investor.
A situation in which one person's gain is another's loss.