A margin call occurs when the value of a trader’s margin account falls below the required maintenance margin level (a certain threshold set by the exchange or trading platform). This typically happens as the market price of an asset fluctuates in real time and the market moves against the trader’s position, causing losses that reduce the account’s equity level.
When the equity level drops below the margin requirement, the trader will get a margin call. When a margin call is triggered, the trader is required to either deposit additional funds or liquidate their positions to meet the minimum margin requirement. At that point, they have to sell some or all of their position (also referred to as liquidation) and/or put more of their own funds into the account in order to bring the equity value back up to the margin requirement level.
If a trader fails to meet the margin call, then the exchange or trading platform can forcibly sell the assets in the account to help pay down the loan. This is done to protect the lender by providing a ‘buffer’ against losses due to the declining value of the collateral.
