What is a margin call in trading?

A margin call occurs when a broker requires the investor to deposit additional funds into their margin account to maintain the required equity level for open positions. This demand arises when the market value of the securities in the margin account falls below a certain threshold, indicating that the investor's equity is insufficient to cover potential losses. The purpose of a margin call is to protect the broker against the risk of the account falling into a deficit, which could happen if the market continues to move unfavorably relative to the investor’s positions.

In the context of trading, it's essential for traders to monitor their margin levels because failing to respond to a margin call can result in the broker liquidating some or all of the trader's positions to cover the required margin. Understanding this concept is crucial for managing risk effectively in leveraged trading scenarios.