HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

Margin Call: What It Is & How to Avoid It


You have probably heard about an unpleasant surprise to traders: a margin call. And we hope you do not know how bad it might be for your money. A margin call is a broker’s demand for a trader to increase their margin account’s value to a minimum balance set by a broker. Unfortunately, some who trade on margin have no clue about the related risks.

But as ominous-sounding as a margin call may be, the fear of it did not keep hungry traders from leveraging their portfolios. So let’s try to simplify this term that causes troubles to traders’ accounts and figure out what a margin call is and how to avoid one. Because forewarned is forearmed.

Key Takeaways

What a margin call is

A margin call refers to margin trading, a popular method among traders to increase their buying power and make larger trades. By opening a margin account, people can trade on margin, meaning they use their own money and borrow money from a broker to trade specific instruments. Margin trading can bring great profits but also magnify big losses.

“Using margin is great when the market moves as expected, but a margin call is awful.”

It comes with an inherent risk that traders must be aware of – margin calls, indicating that instruments held in the margin account have decreased in value. Simply put, a margin call happens when a trader’s account value falls below their broker's required margin maintenance level. Yes, every brokerage company has its minimum maintenance requirements that have to be met by traders while trading on margin. Some brokers have a greater minimum maintenance level than others, with some demanding as much as 30–40%. FBS EU: A "Margin Call" takes place when the client’s Margin Level is at or below 80% for all accounts, except of Crypto accounts which is at or below 100% and the client needs to either close some positions or deposit more funds in his/her account to maintain the relevant positions open.

What triggers a margin call

Various factors can trigger margin calls, but the most common reason is trading on high leverage and using insufficient funds in the account. When traders use leverage, they actually borrow money from their broker to open larger positions. However, leverage can work against traders during high market volatility, economic uncertainty, or drastic price changes, leading to crucial losses that can quickly deplete their account value. The wrong and poorly built trading strategy can also trigger a margin call.

When a margin call happens

Margin calls usually happen during high market volatility or sudden price movements. News, events, economic reports, or other factors can cause the market to move abruptly. Yet, margin calls can occur anytime. Traders who use high leverage and do not have sufficient funds to cover their losses are more likely to receive a margin call during volatile market hours.

How to meet a margin call

If a trader receives a margin call, they should meet it immediately but no later than the specified due date, which commonly varies from two to five days.

To meet a margin call, traders have two options:

When a margin call occurs, the trader must choose to either deposit additional funds or close some of the positions opened on the account. Otherwise, a broker can close out enough of your positions to bring your balance back into compliance, sometimes without notice.

Traders who have met a margin call can contact their broker to determine the due date and possible solutions. By the way, FBS has 24/7 multilingual customer support ready to answer clients’ questions.

How to avoid a margin call

If you don’t understand the margin trading concept and how a margin call works, you will likely experience the shock of your account erupting. But traders can prevent this damaging event. Here are some tips to avoid margin calls:

With these tips, a well-built strategy, and constant learning, you may avoid margin calls in your trading path.

How to calculate a margin call: formula & example

Let's say a trader has a margin account with $20 000 and decides to buy 500 shares of XYZ stock at $50 per share. The total order cost would be $25 000 ($50 per share x 500 shares.). Assuming the broker has a 50% margin requirement, the trader should put down $12 500 (50% of $25 000) and borrow the remaining $12 500 from the broker to complete the purchase.

If the value of XYZ stock falls to $40 per share, the total order value would be $20 000 ($40 per share x 500 shares) – equal to the initial balance in the trader’s margin account.

However, the trader still owes the broker the $12 500 borrowed to purchase the stock. Since the value of the investment has fallen below the 50% margin requirement, the trader receives a margin call from the broker to deposit additional funds or securities to bring the account back up to the required margin level.

To calculate the margin call amount, the broker uses the same formula as in the previous example: Margin Call Amount = (Current Value of Securities in the Account x Margin Requirement) - Account Balance

In this case, the margin call amount would be:

Therefore, the trader should deposit an additional $2 500 to meet the margin call and maintain their position in XYZ stock. If the trader fails to meet the margin call, the broker may liquidate some or all of the open orders to cover the outstanding debt.

How risky margin trading is

Trading becomes riskier when it comes to margin trading. With amplifying gains, it can also amplify losses. Using leverage can quickly wipe out a trader's account if the market moves against them. Additionally, margin calls can be stressful and difficult to manage in rapidly changing markets.

People who want to trade on margin should have solid market awareness and risk tolerance. It’s essential to carefully consider the risks of margin trading before starting it.

Bottom Line

Margin trading can be a lucrative way to trade and increase potential profits, but it comes with higher risks. Traders who want to trade on margin should understand markets, margin trading, and risk tolerance. Additional funds to meet a margin call in the case of one are also necessary. If traders receive a margin call, they should quickly meet the requirements and keep securities from liquidating.

This is for informational purposes only and does not contain — or to be considered as containing — investment advice, suggestion or recommendation for trading.

#source


RELATED

Trading robots. Should you use them in Forex trading?

To increase the profitability of trading on the Forex market, some private traders and investment companies...

Which Cryptocurrency can you realistically trade online?

The financial crisis led to the worldwide distrust in the financial system. To help solve this problem, an anonymous person...

Telcoin: The Future of the Dark Horse of Cryptos

The cryptocurrency world famously has its ups and downs, and May 19 was not a good day. However, investors remain optimistic. Most cryptocurrencies already bounced...

What Buffett and Berkshire Hathaway do in COVID-19 crisis?

Over the course of several decades, Warren Buffett has been taking the investment approach that has made Berkshire Hathaway the sixth largest company...

How to boost your trading efficiency and pave the road to success

Trading offers unique opportunities to earn additional income and establish a profitable business. A strategic mindset is imperative to distinguish yourself from those who squander financial resources...

Pros and cons of trading Forex with Bitcoin

Cryptocurrencies are gaining popularity again. It's the perfect opportunity to use them for your trading portfolio, especially the ever-popular Bitcoin. Here's a short...

What are defensive stocks and why you should consider them?

The market has fallen sharply this year, and investors have seen losses. Question: Can defensive stocks help hedge against risks? What are their advantages?

Should the Fed cut rates?

For the emergence of real crisis conditions and a protracted change in the trend on the stock market, a fundamental change is necessary. It may be a recession...

Forex Education: Does It Make Sense?

Work of any nature requires considerable effort, both moral and physical. Indeed, in addition to having to spend a considerable amount of time on theory...

Nasdaq CFD Trading: Everything You Need To know

The Nasdaq composite index is one of the three most important and popular major stock indices traded on the United States stock market. These three crucial indices...

How to Trade Cryptocurrency Like a Boss

In 2009, bitcoin was relatively worthless, and as such, nobody was interested in knowing how to trade bitcoin. But a decade down memory lane, cryptocurrency is...

All About Forex Day Trading

Day trading refers to the speculation on buying and selling a financial instrument within a single trading day and it is actually a very popular short-term trading strategy...

What is paper trading?

The term 'paper trading' comes from the stock exchange market, where investors who wanted to practice would write their investments on paper...

Understanding Cryptocurrency Market Capitalization

If you have been around cryptocurrencies like Bitcoin and Ethereum for some time, chances are you have heard the term market cap discussed. It is something that helps...

Ultimate guide to Dogecoin trading

Dogecoin is a highly popular "meme coin" that has even attracted the likes of Elon Musk to become a fan. Dogecoin is a cryptocurrency that was created in 2013 as a joke...

Taking Advantage on A Bearish Market

Shorting a stock has been popular and widely accepted investment strategy in past years. It had become increasingly globally known when...

Forex vs. Crypto Trading: Navigating the Complexities and Nuances of Two Diverse Markets

In the high-stakes world of trading, investors are constantly evaluating their options. Forex and cryptocurrency trading are two of the most prevalent choices, each presenting its unique set of opportunities and challenges...

How to Predict Price Movements in the Forex Market in 2022

Many beginning traders do not understand why forex forecasts are necessary. However, analysis of financial markets has been and remains the main guarantee of success of a forex trader. So, how to make an accurate forecast?

Copy trading: tap into the knowledge of top-performing traders and earn money

To be a successful Forex trader, you need to have extensive experience and knowledge of financial markets. But what if you are a novice trader who is just getting started?

How to short Bitcoin

Cryptocurrency bears are dreaded across the market due to the massive losses that investors can make within a very short time. However, as some traders...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.