A margin call is a notification or request from your broker to deposit additional funds into your trading account when the account’s equity falls below a certain level, known as the maintenance margin. It occurs in leveraged trading, such as spread betting or margin trading in the financial markets.
When you open a leveraged position, you are required to deposit an initial amount of money known as the margin. This margin serves as collateral and allows you to control a larger position in the market. The broker sets a maintenance margin level, which is a percentage of the total position value that you must maintain in your account as equity.
Here’s how a margin call typically works:
- You open a leveraged position: Let’s say you deposit £1,000 as margin, and with leverage, you control a position worth £10,000.
- Maintenance margin level: The broker may require you to maintain 20% of the total position value as equity in your account to keep the position open. In this case, the maintenance margin would be £2,000 (20% of £10,000).
- The market moves against your position: If the market moves in a direction that causes losses, and your account equity falls below the maintenance margin level, you will receive a margin call from your broker.
- Margin call notification: The broker will inform you that you need to deposit additional funds to bring your account equity back above the maintenance margin level. This is to ensure that you have enough funds to cover potential losses and meet the margin requirements.
- Responding to the margin call: You have a limited period to respond to the margin call by depositing the required funds. If you fail to do so, the broker may take action to close some or all of your positions to reduce the risk of further losses.
The purpose of a margin call is to protect both the trader and the broker. For the trader, it helps prevent their account balance from going negative, and for the broker, it reduces the risk of not being able to recover the borrowed money in case of significant losses. As a trader, it’s crucial to manage your positions carefully, use appropriate risk management tools like stop-loss orders, and only trade with funds you can afford to lose to avoid reaching a margin call situation.