Finance Interview – Technical Practice Test

A margin call signifies a demand from a broker to a client to deposit more funds or securities into their margin account. This situation arises when the value of the investor's equity falls below a certain threshold due to losses on leveraged investments. In such cases, the broker requires additional collateral to ensure that the investor can cover potential losses. The purpose of a margin call is to protect the broker from the risk associated with lending money for margin trading and to ensure that the account maintains adequate funds relative to the borrowed amount.

Understanding this concept is critical in the context of leveraged trading where investors borrow funds to increase their exposure. If the market moves against them, a margin call ensures that they are notified of the increased risk and provides an opportunity to either add more funds or liquidate positions to minimize losses. This mechanism plays a vital role in maintaining the integrity of the brokerage system and safeguarding against default.