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A margin account can be used for trading cryptocurrency, forex and stocks. This type of account affords investors the power to leverage a higher amount of money which they use to enter a much larger trade for purpose of getting higher profit. Trading on a margin account is like borrowing money from one’s broker to enter a particular trade. A margin account has a minimum amount level that must be held in the account balance to keep the account active. An investor will usually receive a call from the broker when, due to losing trade, the amount of money has reached the minimum level. The purpose of the call is to ask the trader to deposit more money to raise the margin account to the required minimum level. When a trader receives a margin call, he or she is faced with two options. It is either for the investor to heed the margin call by raising the account to the minimum specified level or sell off the assets.
What Would Happen if a Trader Defaults a Margin Call?
In such a case, where a trader defaults in meeting up with the demand of a margin call, the broker has the right to take over the investor’s position by selling the asset. Since it is a business deal between the two of them, the broker will want to avoid running at loss. Also, the broker wouldn’t want to be going after the investor demanding he pays his debts. Before the situation gets to that level, the broker is allowed to liquidate the investor’s account to protect his own business.
Avoiding Margin Calls
Trading on a margin account affords traders the chance of getting more profits from their limited capital. However, It is not all investors that should trade using the leverage of a margin account. An interested trader needs to determine if a margin account will be necessary. This is because of the risk involved in trading with a margin account although a successful trade on a margin account is very rewarding.
To avoid margin calls, an investor should diversify his investment across different trading instruments. This will help to minimize loss. Investors should also create an automatic alerting system That will keep them up to date on the account as it reached a comfortable point above the margin call level. This will help the investors take the necessary steps to salvage their investments. And if an investor gets a margin call, he or she should tend to it quickly to avoid losing the account.
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