Margin Call Stocks and Forex: Understanding and How to Prevent It

call is a warning from a broker or securities to investors to add capital to their investment account. Margin calls can occur in stock and forex trading or are known as forex margin calls.

That is the meaning of a simple margin call in investment. This warning is given when the price of an investment portfolio, such as stocks, foreign currencies, or commodities, continues to fall past the margin or loan limit.

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Margin Call Shares
Margin calls

A stock margin call is a warning from securities to investors to add a certain amount of funds to the account. Usually addressed to customers who use margin trading facilities.

Margin trading facility is a financing or loan facility from securities to conduct margin share transactions on the Indonesia Stock Exchange (IDX). Margin shares are traded shares loans or debts from brokers.

Investors can obtain loans by pledging the shares in their portfolio (collateral). When the guarantee ratio has reached 50%-65%, the security will send a warning or margin call.

This can happen if the price of the shares purchased or pledged continues to fall. That means, investors or customers are required to add capital to repay the loan.

It can be done by refilling or top up funds or selling shares in the portfolio until the guarantee ratio is sufficient, at least 60%.

That way, investors can make transactions again with the loan facility. However, if the customer does not pay the debt, within 3 days after the margin call, the stock account will be suspended from buying. Customers cannot purchase shares.

If they are still absent, the securities will sell the customer’s shares unilaterally (forced sell) according to the amount of obligations on the 4th day.

Example of a stock margin call:

You only have Rp. 10 million in your investment account. Want to buy 20 lots of shares or sheets for Rp. 10,000 per share. The capital requirement means Rp. 20 million.

With the margin trading facility, you can buy the shares you want because you can get a loan of IDR 10 million for transactions. However, along the way, the share price continued to fall, for example to 9800$ per share.

That’s when you will receive a margin call. You have to deposit additional funds of IDR 200 x 2,000 = IDR 400,000. So, the collateral value is the same as the loan.

Margin Call Forex is..

The meaning of a margin call in forex is not much different from the meaning of a stock margin call. The margin call system works almost the same as stocks.

Forex margin call is a warning for traders to deposit more money into the trading account. The goal is to make up for the loss and repay the loan.

When the market moves down, the trader’s margin level will decline, so a margin call warning from the broker is followed.

Example:

The broker has set a margin call at the level of 40%. Trading USD 8,000, suffered a loss due to a decrease in price to USD 5,000. Already using a loan facility of USD 5,000

Margin rate = (USD 8,000 – USD 5,000) / USD 5,000 x 100 = 60%. If the margin level drops again by 20% to 40%, then you will receive a margin call.

Margin Call Shares are…
Buying stock from a loan broker does offer great profit potential because of the leverage yield. But it’s worth the risk, especially if stock or currency prices continue to decline. Investors can lose more money.

Getting a margin call warning is the same. Like an ‘angel of death who is ready to take your life.’ Ignorance with this warning means your investment is over, because the broker will forcefully sell your portfolio to pay off debt.

If many investors get a margin call, the impact could exacerbate market volatility. That’s because investors are forced to sell shares to increase funds or his obligations.

This can lead to a vicious cycle, with strong selling pressure pushing the stock price lower. Worse yet, the more margin calls.

Here are 3 ways to prevent margin calls and manage transaction risk with margin trading facilities:

Using stop loss to limit losses
In investing, investors or traders must have a strategy to reduce the risk of loss. One of them is using a stop loss.

Stop loss is the act of selling a stock at a certain price. This is done so as not to lose too much when the stock price or currency drops drastically.

For example, you buy stock A for Rp. 1,000. Set a stop loss at a price of Rp. 950 or 5% below the purchase price. So, once A’s stock drops, you only lose 5%.

Stop loss can now be installed automatically in the securities’ online trading application. Just set the stop loss at what price, then the system will automatically execute the order.

Keeping the loan amount to an acceptable level debt funds for investment and increasing profit potential or leverage is fine. As long as the amount of the loan is adjusted to financial capacity.

In addition, leverage must also be managed properly. Maximize leverage to be profitable, not detrimental. Because there is a margin interest fee that customers have to pay every month or every year.

When the value of the investment decreases, while the interest rate rises, this results in leverage reaching unmanageable levels.

Attract other investments to prevent margin calls

Another way to prevent margin calls is to immediately deposit additional funds before the guarantee ratio reaches the margin call limit. This is also done in order to increase the margin level.