Market volatility may lead brokers to issue margin calls[i] to investors—i.e., demands of cash or additional collateral from investors trading on margin. Investors may feel such margin calls are unjustified or may disagree with a lender’s valuation of collateral in their account. Lenders may also unilaterally seize and liquidate investor collateral to meet the margin call, often with little or no notice to the investor. This memo addresses some of the most pressing questions being asked by investors and other margin traders in this volatile trading environment.
The mechanics of a margin call are relatively simple. Investors borrow money from brokers to leverage market positions and use the investments as collateral. Investors generally agree to maintain a certain “margin” of equity in the account. When investor equity decreases due to changes in collateral value, brokers may issue margin calls to increase the investor’s equity to meet the margin requirements.
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