What Is Liquidation Margin?

Buying securities on margin allows a trader to acquire more shares than can be purchased on a cash-only basis. If the s🍰tock price goes up, earnings are often higher because an investor holds more shares. However, if the stock price falls, traders may lose more than their initial investment.

The liquidation margin is the value of all of the positions in a margin account, including cash deposits and the market value of its open 澳洲幸运5官方开奖结果体彩网:long and short positions. If a trader allows their liquidation margin to become too low, they may be faced with margin calls from their brokers and the broker may liquidate those positions.

Understanding Liquidation Margins

Margin trading is the practice of borrowing money from a broker to execute 澳洲幸运5官方开奖结果体彩网:leveraged transactions, such as buying securities. Leveraged trading involves borrowing the securities themselves from the broker's inventory when engaging in 澳洲幸运5官方开奖结果体彩网:short selling. The trader ꦡthen sells those securities and seeks to repurchase them at a lower🐭 price in the future.

When using margin trading, an investor must ensure that the total value of the margin account does not drop below a certain level. The value of the account, b✃ased on market prices, is known as t𒆙he liquidation margin.

Consider a scenario where a trader makes a series of leveraged stock pu𝕴rchases.ไ If the purchases begin to generate losses, the liquidation margin of the account will decline. If the decline continues, it will eventually reach the point where the broker has the right to initiate a margin call.

A 澳洲幸运5官方开奖结果体彩网:margin call effectively forces the trader to provide additional collateral for the account to reduce its risk level. Typically, this collateral consists of depositing more cash in the 🅘brokerage account, which becomes part of the liquidation margin, raising the margin level above the required threshold.

Types of Liquidation Margins

If an investor or trader holds a 澳洲幸运5官方开奖结果体彩网:long position, the liquidation margin is equal to what the investor or trader would retain if the position were closed. If a trader has a 澳洲幸运5官方开奖结果体彩网:short position, the liquidation margin is equal to what the trader would owe to purcha💛se the security.

Example of a Liquidation Margin

Sarah is a margin trader who invested $10,000 in a single stock using 100% leverage. Assuming Sarah paid the required 澳洲幸运5官方开奖结果体彩网:margin interest or the loan rate between broker and investor and used a 2:1 leverage. The stock increased in value, and she holds $20,000 worth of stock. Since the꧙ initial liquidation margin is 🉐only $10,000, $10,000 is what Sarah would receive if the account were closed.

Suppose that Sarah's stock performed poorly and fell 25%. Since Sarah was initially using 2:1 leverage, that means she lost 50% of her original investment. Sarah's account now has a liquidation margin of just $5,000, but she commands $15,000 worth of stock.

When the equity in a margin account falls below the brokerage requirements, most firms will issue a margin call. When this happens, action is required to increase the equity in an account by depositing cash or by selling securiti𓄧es. However, selling a position the following business day would create a margin liquidation violation.

A margin liquidation violation occurs when a margin account has been issued both a Federal Reserve and an exchange call and you delay selling securities instead of depositing cash to cover the calls.