What is a “margin-call” and how are they enforced?
"Simplest way to answer this is that on margin, one is using borrowed assets and thus there are strings that come with doing that. Thus, if the amount of equity left gets too low, the broker has a legal obligation to close the position which can be selling purchased shares or buying back borrowed shares depending on if this is a long or short position respectively. Investopedia has an example that they walk through as the call is where you are asked to either put in more money to the account or the position may be closed because the broker wants their money back. What is Maintenance Margin? A maintenance margin is the required   amount of securities an investor must hold in his account if he either   purchases shares on margin, or if he sells shares short. If an   investor's margin balance falls below the set maintenance margin, the   investor would then need to contribute additional funds to the account   or liquidate stocks in the account to bring the account back to the   initial margin requirement. This request is known as a margin call. As discussed previously, the Federal Reserve Board sets the initial   margin requirement (currently at 50%). The Federal Reserve Board also   sets the maintenance margin. The maintenance margin, the amount of   equity an investor needs to hold in his account if he buys stock on   margin or sells shares short, is 25%. Keep in mind, however, that this   25% level is the minimum level set, brokerage firms can increase, but   not decrease this level as they desire. Example: Determining when a margin call would occur. Assume that an   investor had purchased 500 shares of Newco's stock. The shares were   trading at $50 when the transaction was executed. The initial margin   requirement on the account was 70% and the maintenance margin is 30%.   Assume no transaction costs. Determine the price at which the investor   will receive a margin call. Answer: Calculate the price as follows: $50 (1- 0.70) = $21.43 1 - 0.30 A margin call would be received when the price of Newco's stock fell   below $21.43 per share. At that time, the investor would either need   to deposit additional funds or liquidate shares to satisfy the initial   margin requirement. Most people don't want ""Margin Calls"" but stocks may move in unexpected ways and this is where there are mechanisms to limit losses, especially for the brokerage firm that wants to make as much money as possible. Cancel what trade? No, the broker will close the position if the requirement isn't kept. Basically think of this as a way for the broker to get their money back if necessary while following federal rules. This would be selling in a long position or buying in a short sale situation. The Margin Investor walks through an example where an e-mail would be sent and if the requirement isn't met then the position gets exited as per the law." "If you don't have a margin account, then you will not have margin calls. You need a margin account if you wish to ""buy on margin"", to sell stocks ""short"", or to sell options, or maybe some other esoteric things I have not thought of.  If you don't do those things, then you do not need a margin account and will not get margin calls. In your example, it doesn't sound like margin has been used, If you deposit $20 and used it to buy $20 of stock and it then falls to $5, ""they"" did not lose the money, you did.  But if no margin was used, then no margin call would result."
If one wants to have a bound on the loss percentages that are acceptable, this is would be a way to enforce that. For example, suppose someone wants to have a 5% stop-loss but doesn't want this to be worse than 10% as if the stock goes down more than 10% then the sell shouldn't happen. Thus, if the stock opened in a gap down 15% one day, this triggers the stop-loss and would exit at too low of a price as the gap was quite high as I wonder how familiar are you with how much a stock's price could change that makes the prices not be as continuous as one would think. At least this would be my thinking on a volatile stock where one may want to try to limit losses if the stock does fall within a specific range. That is the maintenance margin required for that position.  Whenever you trade using your margin account, you must (by law, and also separately often by stricter policies from the brokerage) have a certain percentage of equity - at least 25%, often higher.  That protects the brokerage from significant losses if your position drops in value significantly (hopefully preventing the brokerage from failing outright in the event of a major collapse).  If the amount of equity falls below the maintenance requirement, you will have a margin call and be required to put some cash (or equity) into the account to maintain that level. See Maintenance Margin definition on Investopedia for more information. "For sake of simplicity, say the Euro is trading at $1.25. You have leveraged control of $100,000 given the 100x leverage. If you are bullish on the Euro, you are long 80,000 euros. For every 1% it rises, you gain $1000. If it drops by the same 1%, you are wiped out, you lost your $1000. With the contracts I am familiar with, there is a minimum margin, and your account is ""marked to market"" each night. If your positive balance drops too low, you get the margin call. It's a zero sum game, for every dollar you make, there's a guy on the other side of the trade. Odds are he's doing this full time and is smarter than you." "This is called a Contingent Order and is set up so if one order is filled (in this case) the other order is cancelled.  It's a common desire that one would wish to have a stop-loss in place but also a targeted sell price for their in-the-money sell point.  Your broker will tell you all you need to know about how to enter this, if you explain you'd like to place a contingent order. (As Victor noted below, your specific order would be a ""One Cancels Other"" or ""OCO"") Great first question, welcome to Money,SE." Investopedia has a good explanation of the term shorting which is what this is. In the simplest of terms, someone is borrowing the bond and selling it with the intent to replace the security and any dividends or coupons in the end. The idea is that if a bond is overvalued, one may be able to buy it back later for a cheaper price and pocket the difference. There are various rules about this including margin requirements to maintain since there is the risk of the security going up in price enough that someone may be forced into a buy to cover in the form of a margin call. If one can sell the bond at $960 now and then buy it back later for $952.38 then one could pocket the difference. Part of what you aren't seeing is what are other bonds doing in terms of their prices over time here. The key point here is that brokers may lend out securities and accrue interest on loaned securities for another point here. A long straddle using equity would be more akin to buying a triple leveraged ETF and an inverse triple leveraged ETF, only because one side will approach zero while the other can theoretically increase to infinity, in a short time span before time decay hits in. The reason your analogy fails is because the delta is 1.0 on both sides of your trade. At the money options, a necessary requirement for a straddle, have a delta of .5 There is an options strategy that uses in the money calls and puts with a delta closer to 1.0 to create an in the money strangle. I'm not sure if it is more similar to your strategy, an analogous options strategy would be better than yours as it would not share the potential for a margin call. In the case of regulated, exchange-traded options, the writer of an options contract is obliged to maintain a margin with their broker, and the broker is obliged to maintain a margin with the clearing house.  (Institutional writers of options will deal directly with the clearing house.) In the event that the writer is unable to make a daily margin call, the broker (or clearing house) may automatically close out (all of) their positions using existing margin held.  If there was a shortfall, the broker (or clearing house) would be left to persue the client (writer) to make good on their obligations. None of this effects the position of the original buyer of the options contract.  Effectively, the buyer's counterparty is their broker's clearing house account. You have to call Interactive Brokers for this. This is what you should do, they might even have a web chat. These are very broker specific idiosyncrasies, because although margin rules are standardized to an extent, when they start charging you for interest and giving you margin until settlement may not be standardized. I mean, I can call them and tell you what they said for the 100 rep. Depends on the stock involved, but for the most part brokerages allow you gain entry at 50%, meaning you can short twice the cash on hand you have.   Going forward, you need to maintain 30%, so on a $10,000 short, you'd have to maintain $3000 in your account. Example, an account with $5000 cash - You can short $10,000 securities.  Let say 100 shares of xyz at $100 per share. After trade settles, you won't receive a margin call until your balance falls to $3000, probably right around the time xyz rises to $120 per share.  Riskier stocks will have higher margin maintenance requirements - leveraged vehicles like FAS/FAZ (triple leveraged) require 90% margin (3x30%) if they are allowed to be 'shorted' at all. I personally spoke with a Questrade agent about my question. To make a long story short: in a margin account, you are automatically issued a loan when buying U.S. stock with a Canadian money. Whereas, in a registered account (e.g. RRSP), the amount is converted on your behalf to cover the debit balance. Me: What happens if I open an account and I place an order for U.S. stocks   with Canadian money? Is the amount converted at the time of transfer?   How does that work? Agent: In a margin account, you are automatically issued a loan   for a currency you do not have, however, if you have enough buying   power, it will go through. The interest on the overnight balance is   calculated daily and is charged on a monthly basis. We do not convert   funds automatically in a margin account because you can have a debit   cash balance. Agent: In a registered account, the Canada Revenue Agency does not allow a debit   balance and therefore, we must convert your funds on your behalf   to cover the debit balance if possible. We convert automatically   overnight for a registered account. Agent: For example, if you buy U.S. equity you will need USD to buy it,   and if you only have CAD, we will loan you USD to cover for that   transaction. For example, if you had only $100 CAD and then wanted to   buy U.S. stock worth $100 USD, then we will loan you $100 USD to   purchase the stock. In a margin account we will not convert the funds   automatically. Therefore, you will remain to have a $100 CAD credit and   a $100 USD debit balance (or a loan) in your account. Me: I see, it means the longer I keep the stock, the higher interest   will be? Agent: Well, yes, however, in a registered account there will be not   be any interest since we convert your funds, but in a margin account, there will   be interest until the debit balance is covered, or you can manually   convert your funds by contacting us. "This is the sad state of US stock markets and Regulation T. Yes, while options have cleared & settled for t+1 (trade +1 day) for years and now actually clear ""instantly"" on some exchanges, stocks still clear & settle in t+3.  There really is no excuse for it. If you are in a margin account, regulations permit the trading of unsettled funds without affecting margin requirements, so your funds in effect are available immediately after trading but aren't considered margin loans.  Some strict brokers will even restrict the amount of uncleared margin funds you can trade with (Scottrade used to be hyper safe and was the only online discount broker that did this years ago); others will allow you to withdraw a large percentage of your funds immediately (I think E*Trade lets you withdraw up to 90% of unsettled funds immediately). If you are in a cash account, you are authorized to buy with unsettled funds, but you can't sell purchases made on unsettled funds until such funds clear, or you'll be barred for 90 days from trading as your letter threatened; besides, most brokers don't allow this.  You certainly aren't allowed to withdraw unsettled funds (by your broker) in such an account as it would technically constitute a loan for which you aren't even liable since you've agreed to no loan contract, a margin agreement.  I can't be sure if that actually violates Reg T, but when I am, I'll edit. While it is true that all marketable options are cleared through one central entity, the Options Clearing Corporation, with stocks, clearing & settling still occurs between brokers, netting their transactions between each other electronically. All financial products could clear & settle immediately imo, and I'd rather not start a firestorm by giving my opinion why not. Don't even get me started on the bond market... As to the actual process, it's called ""clearing & settling"". The general process (which can generally be applied to all financial instruments from cash deposits to derivatives trading) is: The reason why all of the old financial companies were grouped on Wall St. is because they'd have runners physically carting all of the certificates from building to building.  Then, they discovered netting so slowed down the process to balance the accounts and only cart the net amounts of certificates they owed each other.  This is how we get the term ""bankers hours"" where financial firms would close to the public early to account for the days trading.  While this is all really done instantly behind your back at your broker, they've conveniently kept the short hours." In the U.S. it is typical that a stock brokerage account can be set up to buy stock with up to half the cost being borrowed from the broker.  This is called a margin account.  The stock purchased must remain in the account until sold (or the loan is paid off), as it serves as built-in collateral for the loan.  If the market price for the stock goes down too much, you will be required to add money, or the stock will be sold to cover the loan. See this question for some more information. I'm not an expert on HFT. But order cancellation is not an indicator of front running...  Let's say you are willing to post 1000 shares at 25.00. Someone jumps in and takes 500. From past trading analysis you know that this is indicative of a larger order - say because of the speed of the execution you expect another 10000 shares to follow. This will push up the price because the demand curve has changed. If you leave your remaining 500 shares listed at 25, they will be lifted and the price will move up to, say, 25.25. This is not shady order cancellation- this is rational response to new information about demand for the stock, and not wanting to get screwed for selling at a lower price than equilibrium.   Or (I think this is a valid example but again not an expert here) say you are willing to sell 100 shares. You don't know where the buys will be routed so you post your 100 on multiple platforms. When one gets lifted you cancel the others.  Frankly the best argument against HFT is the billions of dollars being poured into infrastructure of questionable economic utility,  or at the very least diminishing marginal utility. But all this front running nonsense is just that. "FINRA Description of Day Trading rules The rules adopt a new term ""pattern day trader,"" which includes any   margin customer that day trades (buys then sells or sells short then   buys the same security on the same day) four or more times in five   business days, provided the number of day trades are more than six   percent of the customer's total trading activity for that same   five-day period. So, there's several ways to avoid being labeled a pattern day trader:" Levarge in simple terms is how of your own money to how much of borrowed money.   So in 2008 Typical leverage ratios were Investment Banks 30:1 means that for every 1 Unit of Banks money [shareholders capital/ long term debts] there was 30 Units of borrowed money [from deposits/for other institutions/etc]. This is a very unstable situation as typically say you lent out 31 to someone else, half way through repayments, the depositors and other lends are asking you 30 back. You are sunk. Now lets say if you lent 31 to some one, but 30 was your moeny and 1 was from deposits/etc. Then you can anytime more easily pay back the 1 to the depositor. In day trading, usually one squares away the position the same day or within a short period. Hence say you want to buy something worth 1000 in the morning and are selling it say the same day. You are expecting the price to by 1005 and a gain 5. Now when you buy via your broker/trader, you may not be required to pay 1000. Normally one just needs to pay a margin money, typically 10% [varies from market to market, country to country]. So in the first case if you put 1000 and get by 5, you made a profit of 0.5%. However if you were to pay only 10 as margin money [rest 990 is assumed loan from your broker]. You sell at 1005, the broker deducts his 990, and you get 15. So technically on 10 you have made 5 more, ie 50% returns. So this is leveraging of 10:1. If say your broker allowed only 5% margin money, then you just need to pay 5 for the 1000 trade, get back 5. You have made a 100% profit, but the leveraging is 20:1.  Now lets say at this high leveraging when you are selling you get only 990. So you still owe the broker 5, if you can't pay-up and if lot of other such people can't pay-up, then the broker will also go bankrupt and there is a huge risk.  Hence although leveraging helps in quite a few cases, there is always an associated risk when things go wrong badly.