Ace the AFP Exam 2025 – Boost Your Financial Wizardry!

A "margin call" is a critical concept in financial trading, particularly in the context of margin accounts. It occurs when the value of the investor's margin account falls below the broker's required minimum amount, which is known as the maintenance margin. In this situation, the broker demands that the investor deposit additional funds or securities into their account to restore it to the required level. This process is essential for mitigating the broker's risk, as it ensures that there are enough assets to cover potential losses on leveraged positions.

In essence, a margin call is a safeguard for brokers against the increased risk of loss due to market fluctuations. If the investor fails to meet the margin call by providing the required additional capital or securities, the broker has the right to liquidate part or all of the investor's positions to bring the account back into compliance, thereby protecting their interests.

This understanding of a margin call is crucial for any investor engaging in leveraged trading, as it underscores the importance of maintaining sufficient equity in a margin account to avoid forced liquidations.