Margin Trading

• Margin trading is a situation in which traders have bought stock with the intention of selling it at a profit, but have not yet paid the full price. A common example is when a brokerage firm allows traders to effectively borrow money to buy stock. This allows the trader to deal in larger quantities, which makes it more viable to make a profit even if the percentage gain on the stock is small. A form of margin trading also can be used in derivative deals in which a trader is effectively making a financial wager with an exchange but based on the performance of a financial asset rather than, for example, a sports event. In such a deal, not only is it uncertain which side will come out ahead but the amount that will change hands also is unpredictable.
  
  

Margin Requirements

• In margin trading, the brokerage firm will usually apply a margin. This means the person must have paid a certain proportion of the purchase price in cash, which acts as a safety net for the brokerage firm in case the deal goes sour and the person turns out to be unable to repay the money borrowed to buy the stock. In some cases, the exchange may insist on such a payment. With derivative deals between a trader and an exchange, the exchange may require a trader to put up a proportion of his potential losses, again to give a degree of protection against nonpayment.
  
  

Cash Call

• A cash call, or margin call, comes about when circumstances in the market change such that the trader's potential losses become higher. With stock trading, this would happen if the stock price falls, making it more likely the trader will wind up owing the brokerage firm money when the stocks are sold. With derivatives, this would happen if the underlying asset price changes in a way that makes it more likely the trader will have to pay a high price when the deal concludes. In such circumstances, the required margin will increase above the amount the trader has already put up in cash. The cash call is the demand that the trade put up more cash to make up the difference.
  
  

Disambiguation

• In the United Kingdom, "cash call" in the context of securities trading does not relate to individual investors trading with one another. Instead the term refers to a company that already is listed on a stock exchange attempting to raise more cash by issuing new stock to existing investors. This can be unpopular as it effectively means the existing shares become less valuable, an effect known as dilution.