Etrade Cash Call
What is an Etrade Cash Call? For some, it can be a rather terrifying experience, and usually occurs when you have over leveraged yourself. Essentially, this happens when you have opted to trade with margin, or you borrowed money to pay for stocks, and then the value of those stocks drops to the point where you do not have enough capital in your trading account to make up for the value of that debt.
A cash call will then occur, where the brokerage will notify you of that lack of funds and notify you of the next steps that are to be followed.
You can see from the tweet from Etrade that a "cash call is a notice to satisfy a negative balance in a brokerage account either by depositing cash or selling securities."
I believe that a lot of people will use the terms cash call and margin call interchangeably, and they essentially mean the same thing.
There are a variety of different ways that trading platforms such as Etrade deal with cash calls. Let's look at an example of how this can occur.
Margin Resulting in an Etrade Cash Call
Margin is a form of credit that is provided by almost all brokerage firms, including Etrade. If it is used correctly, it can allow a trader to be extremely profitable. However, when it is not used correctly, it can also multiply losses exponentially.
Let's say that you invest $1,000 into stock X, which is worth $10 a share. If you are trading with a margin of 50%, which is the highest amount legally allowed in the U.S. by the SEC, you will be able to get 150 shares of the stock. The brokerage has loaned the value of an additional 50% to you, allowing you to by 150% with the cost of 100%.
However, if there is a turn in the market and stock X becomes bearish, you will start to lose money on all 150%. Ultimately, you will get to a point where you will be at a $1000 loss. This is when you will receive your Etrade cash call.
This is just a general example, and each platform will deal with cash calls slightly differently.
When Do You Get an Etrade Cash Call?
Due to the fact that each trading platform sends out cash calls and deals with them differently, it is important to look at the Etrade cash call specifically.
There is an important number to take into account here. It is called the minimum margin. It is the amount that you need to have in your account before the brokerage will consider you for margin, or even for short selling.
Many trading platforms, including Etrade, will initiate a cash call when your account reaches the value of this minimum margin.
Depending on the settings that you have on your trading profile, the debt will be settled immediately, through the asset on which it is owed. In other words, if you have reached the minimum margin of your account due to the dip in the price of stock X, everything that you have of stock X will immediately be sold.
This process is usually automated, and done at the same time that the cash call is sent out.
In some cases, which are not always recommended for retail traders, the Etrade cash call can be sent out, but as long as the value of the total portfolio exceeds the minimum margin, no automated sale will occur. This does mean that the stock may continue to devalue, with the margin causing even larger losses.
If this loss becomes too big, and you do not have the funds available to deposit in order to compensate for these additional losses even after the asset on which you have margin has been sold, the brokerage is legally allowed to sell off any other positions in order to satisfy this debt.
Another example of when you may incur a cash call is when your account enters the negatives due to the fact that there were insufficient funds to cover a fee attached to the brokerage. This can happen in accounts that have been inactive for an extended period of time, especially those that incur inactivity fees.
Paying an Etrade Cash Call
Usually, an etrade cash call needs to be settled immediately. However, due to the delay between when the assets are sold or when a direct deposit is initiated and when the money appears in your account, it may take several business days for the matter to be resolved. The maximum amount of time that Etrade allotted for resolving the issue is four business days.
In cases where you are able to, whether it is an Etrade cash call, or that of any other brokerage platform, it is recommended to resolve the issue as quickly as possible.
Is there Interest on Etrade Cash Calls?
You can be charged interest on Etrade cash calls. Depending on the type of account that you have with them as well as the amount of margin that was used, the interest may vary. Of course, this will only continue up to a point and then your remaining securities may be sold and the account closed.
Additionally, there are several fees associated with Etrade cash calls which cannot be avoided, even if you pay the necessary funds as soon as possible.
Consequences of an Etrade Cash Call
It is incredibly important to keep an eye on your account when trading with margin, but sometimes slip ups still happen. If you are issued with an Etrade cash call, or a good faith violation/freeride violation, you may be limited to working with cash only for up to 90 days after the due date of the cash call. All possibilities of margin will be restricted.
Avoiding Etrade Cash Calls
It is best to make sure that you have enough funds in your trading account at all times so that, if you do stumble upon a problem, you are easily able to settle the funds. Remember, margin is an incredibly useful tool that can help you maximize profits, but there is also an increased risk. Trade responsibly.
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