FxBrokerReviews.org – When a trader receives a notification that the capital in their account is insufficient to maintain an open position, it is known as a “margin call.” A margin call may force the trader to exit positions to lower the needed maintenance margin or provide extra cash to balance the account.
You are “on margin call” because there isn’t enough money in your account to cover the required margin, which is another way to characterise the condition of your account. There are two different forms of margin required when trading leveraged products, such as CFDs: a deposit margin required to initiate the position and a maintenance margin required to keep the position open. A margin call will be made if the latter is not maintained.
A margin call is a communication from your provider asking you to top up your account to bring your balance up to the minimum margin if a transaction starts to lose money and your account balance is no longer sufficient to keep the position open. The post will continue to be available if you provide more money. If not, your provider could close the position and you’d be responsible for any losses you suffered.
The practice of brokers phoning their clients to inform them of the accounting shortfall gave rise to the phrase “margin call.” However, the majority of margin calls these days are sent through email.
What is a Margin Call?
When your broker alerts you that your margin level has dropped below the necessary minimum level (the “Margin Call Level”), this is referred to as a “margin call.”
Nowadays, the notice is typically sent as an email or text message instead of a phone call. No matter how you are informed, you don’t like how you feel. When your floating losses exceed your used margin, a margin call happens. Your equity is thus lower than your used margin (since floating losses reduce your Equity).
Also read: What Is The Margin In Forex Trading, And How To Calculate
Causes of Margin Call in Forex
A margin call occurs when a trader runs out of useable or free margin. In other words, more money is required for the account. This frequently occurs when trading losses bring the useable margin below a threshold the broker has set as acceptable.
When traders allocate a substantial part of equity to utilised margin, leaving little room for loss absorption, a margin call is more likely to happen. This is a crucial method from the broker’s perspective in order to successfully manage and lower their risk.
The leading reasons for margin calls are listed below, in no particular order:
- Retaining a lost transaction for too long, which reduces the available margin.
- In addition to the first factor, your account may have been overextended.
- A deficiently financed account that would drive you to trade aggressively with insufficient available margin.
- Trading without stops when the price is moving strongly against you.
Margin Call Example
Joe purchases $100 worth of stock in a corporation with startup and maintenance margins of 50% and 30%, respectively. He borrows $50 from a stockbroker and spends $50 in cash.
Using the margin call formula above, he gets:
Margin Call Price = ($100) * {(1-50%) / (1-30%)}
= $71.43
When the limit exceeds $71.43, Joe will receive a warning call. He will begin the process of depositing the required amount as soon as possible.
Also read: How Much Money Do You Need To Start Forex Trading?
Margin Call Formula
In order to determine when an account has fallen below the required minimum margin, the margin call formula is applied.
The margin call formula is
margin call price = initial public price * 1- initial margin/1-maintanance margin
Each term defined in the formula:
- Initial public price: the price at which the investor purchased the investment vehicle (stock or bond)
- Initial margin: the minimum amount an investor must pay for the financial security
- Maintenance margin: the amount of equity, or value, that must be maintained in the margin account.
How to Avoid Margin Calls?
Not having a margin account at all is the simplest approach to prevent a margin call. It is simply not essential to purchase shares on margin unless you are a skilled trader in order to get respectable profits over the long term. Here are some steps you may take to prevent a margin call if you do have a margin account.
- Have extra cash on hand: If a margin call occurs, having additional funds that can be placed into your account should be helpful. Adding more money to your deposit is one technique to meet the margin requirements.
- Diversify to limit volatility: Diversification should lessen the likelihood of a severe decrease that may soon result in a margin call. On the other hand, having an excessive amount of exposure to risky assets might make you subject to sudden drops in value that could result in a margin call.
- Track your account closely: While most individuals would be better off not checking their portfolios every day, you should watch your margin balance daily if it is considerable. By doing so, you’ll be able to monitor the state of your portfolio and determine whether you’re approaching the maintenance margin threshold.
What Happens When You Get a Margin Call?
Nowadays, when an investor checks in to check their account balance, a big banner advertising a margin call is typically shown on the website. If the broker is unconcerned, he or she could offer you some wiggle room to add more cash or assets to your account and thereby increase the equity worth.
If not, the broker can start liquidating your securities to raise money. The broker does not want to pursue you to recover a debt because it is concerned with safeguarding its financial situation. It has no duty to provide you more time to fulfil a margin call as a result. Before selling off assets in your account to pay off any margin debt, it does not need to have your permission.
It’s possible that you won’t get a chance to make things right. You agreed to the terms of the margin call in the account agreement you signed when you created your account, thus you must accept the result.
Also read: A Complete Guide To Forex Options Trading: Definition And How It Works
Summary
It’s not for everyone to buy on margin. There are drawbacks even if it can provide investors with more value for their money. For starters, it only benefits you if the value of your shares rises by enough to pay back the margin loan (and the interest on it). The requirement that investors satisfy margin calls for money can be a nuisance as well.
You can be required to deposit more money and assets in response to a margin call. You could even need to liquidate your current possessions. Alternatively, you might need to close the margined position at a loss. You might need to sell securities at prices below what you had anticipated fulfilling the call since margin calls can happen when markets are erratic.
