How To Avoid Margin Call
Avoiding a margin call, which happens when the value of your investments falls below the required margin level in a margin account, requires careful risk management and monitoring. Here are some practical tips:
How to Avoid a Margin Call
- Understand Margin Requirements
- Know your broker’s initial and maintenance margin requirements.
- Keep track of how much you’ve borrowed and the current value of your holdings.
- Maintain a Healthy Equity Cushion
- Keep your account equity well above the minimum maintenance margin.
- Avoid borrowing the maximum amount allowed.
- Use Stop-Loss Orders
- Set stop-loss orders to automatically sell positions if prices fall to a certain level, limiting losses.
- Diversify Your Portfolio
- Don’t put all your borrowed money into one or two risky stocks.
- Spread investments to reduce volatility risk.
- Monitor Your Account Regularly
- Check your portfolio daily to track price movements and margin levels.
- Stay informed about market conditions.
- Avoid Overtrading
- Frequent buying and selling can increase risk and transaction costs.
- Stick to a well-thought-out strategy.
- Have Extra Cash Ready
- Keep some cash or liquid assets available to add funds quickly if needed to meet a margin call.
- Limit Use of Margin for Highly Volatile Stocks
- Margin on volatile stocks is riskier since prices can swing widely.