A margin call, also known as a margin stop, is a protective measure that helps traders to manage their risk and prevent additional losses. It is a notification from your broker that you are in danger of the possibility of having some or all of your positions forcibly closed, or liquidated. In this article, you can learn all you need to know about the meaning of margin call, why it happens, how you can potentially avoid it, and how to react in case it does happen.
What is the Meaning of Margin Call?
- A margin call, also known as a margin stop, is a protective measure that helps traders to manage their risk and prevent additional losses. It is a notification from your broker that you are in danger of the possibility of having some or all of your positions forcibly closed, or liquidated.
- The limit level is calculated by dividing your equity by the required margin and multiplying by 100%.
- Margin calls happen when the percentage of the equity in the account drops below the maintenance margin requirement.
- At XTB, a margin call occurs when your margin level falls below 100%.
- A stop out is the act of closing, or liquidating, your positions.
- At XTB, a stop out occurs when your margin level falls below 50%.
- Once a stop out occurs, your open position with the biggest loss will be automatically closed until your margin level returns back above 50% to protect your account from suffering further losses. This is how XTB helps you to manage your risk.
- To avoid being closed out of your position by a stop out, you’ll need to ensure your margin level remains above 50% by depositing more funds.
Limiting losses is one of the most important aspects of trading and many traders choose to use stop loss orders as a protective measure. On the other hand, some traders decide to manage their risk manually by monitoring their open transactions.
Your margin level is the deposit required to maintain each open trade on your account. To open and maintain your trade, you must have sufficient trading resources to cover the margin requirement at all times.
Free margin represents the amount of capital you have remaining to place new trades or cover any negative price moves in your open trades.
The margin stop is a protective measure, particularly for traders who do not use stop loss orders. When the margin level falls below 50%, your open position with the biggest loss will be automatically closed as an in-built safety mechanism.
In the example above, a 5 lot position has been opened and the margin level is currently over 2000%. If the margin level falls to under 50%, then the system will automatically close out the trade to prevent further losses.
What Triggers a Margin Call?
When a trader is buying and selling securities using both their own funds and money borrowed from a broker, the trader is buying on a margin. This means that their equity in the investment is equal to the market value of the securities minus the amount they borrowed from the broker.
A margin call is triggered when the trader’s equity falls below a certain level required by the broker. Margin calls can occur at any time due to a drop in account value. However, they are more likely to happen during periods of market volatility.
How to Avoid a Margin Call
If you wish to invest with margin, there are a few things you can do to manage your account, avoid a margin call, or be ready for it if it happens.
- Build a well-diversified portfolio. This may help limit margin calls since a single position is less likely to decrease the account value.
- Monitor your open positions, equity, and margin loan on a regular basis, ideally daily.
- Create a custom-made alert at some comfortable level above the margin maintenance requirement. If your account falls to it, deposit funds or securities to increase your equity right away, before margin call occurs.
- If you do receive a margin call, make sure to take care of it immediately.
- Make sure you have cash available to place in your account immediately in case you receive a margin call.
FAQ
A margin call will force you to boost your account equity either by adding additional cash and securities, or by selling existing holdings. Because margin calls often occur during periods of extreme volatility, you may be forced to sell securities at depressed prices.
A margin call occurs when a margin account runs low on funds, usually because of a losing trade. Margin calls are demands for additional capital or securities to bring a margin account up to the maintenance requirement.
Normally, the broker will allow from two to five days to meet the call.
A failure to promptly meet the broker’s demands can result in the broker selling off the investor's positions without warning, as well as charging any applicable commissions, fees, and interest.
When a trader’s locked collateral has increased in value, they may ask that some of their collateral is released back to them. The process of releasing collateral back to the trader is called a reverse margin call.
Even the most professional traders experience margin calls during their trading journey. It's nothing to be scared of but it's important to understand what a margin call is and why it's happening. Normally a margin call will mean that you don’t have enough funds in your account to maintain a trade and/or a trade has gone sharply against what you originally expected. In those moments its important to learn about why it happened and what changes you can make to your risk management strategy for your next trade.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.
