What is a Margin Call?

The margin call, or margin call, signals the end of the game for a trader. If the If your margin can no longer cover your losses, you have a choice: To live or to die.
When you do When trading derivatives, you deposit margin to cover your losses. If your losses increase, the required margin will also increase. It's the same principle as insurance. Your broker, if it's not a scam, will ask you to adjust the margin, otherwise they will close the position. This request for additional capital is called a margin call.

La Margin is at the heart of trading. trading with margin, or margin trading , allows you to have access to leverage effects that range increase your capital.
La definition of margin trading, it's a Leveraged trading. This allows you to take positions far beyond your financial capacity.

La margin is a technical trading term. To take a position on lots worth $100,000, you have a margin (or (Coverage) of 0.2% of the price to be paid. This is your entry ticket to Forex. 

We explain how it works.

Definitions

Lever : Leverage, leverage or even leverage This is a metaphor. You have insufficient capital to enter the markets, so you will increase your capital through leverage. This way, you multiply the power of your capital tenfold; that's the principle of leverage: multiplying forces tenfold. Leverage can have different values: a multiplier of 10, 50, or 100. The maximum is generally 500. 
Leverage can increase gains, but also losses.
Forex: The term Forex refers to the currency exchange. The euro trades against the dollar, the yen against the pound sterling. This market determines the price of sovereign currencies. In Forex trading, currencies are traded in lots of 100 units. A lot of EURUSD contains 000 euros. This kind of market is reserved for banks. 
The lever allows you to access it. 
CFD : Contract for differences . It is the name in English of contract which allows you to trade on the Forex market. Margin rates are applied to these contracts. To explain further, it's the difference between the asset's value at the opening and closing of the contract that matters. If the difference is positive, you make money; if it's negative, you lose money. 

Broker A broker is a financial intermediary like Vanatge FX. Depending on the broker you choose, leverage and fees will vary. The broker plays a crucial role in your investments; they are the ones who lend you the money for your trades. margin trades. 

What is a Margin (or Margin)?

Margin : Share required to open a leveraged position. To open three positions of 100 euros with a leverage of 000, you will have 500 euros of margin (600 / 300). Since margin is a ratio, some people talk about margin rate. The definition remains the same.

Margin or hedging is the system of investing in the markets. In Forex, the lot size is 100 euros. Very few investors can afford to bet that much. As a reminder : you should only bet what you are willing to lose.
Do you have 100 euros to lose? No. No worries, neither do we!
If the position costs €100,000 and the leverage is 500, your margin will be 0,2%, or €200. We would say, “The margin required to open this position is €200.” It is important to understand how margin is calculated. 

How to Calculate your Margin in Trading?

Here is the formula for calculating margin in Forex: 

Position price * margin percentage

A position of 2 lots of EURUSD: one lot is worth 100 000 EUR, the position is therefore worth 200 euros.

• For this example, the broker asks for a margin of 0.2% .

• The margin will therefore be 200 * 000% = 0,2 euros.

A position of 2 lots of EURUSD: one lot is worth 100 000 EUR, the position is therefore worth 200 euros.

• For this example, the broker asks for a margin of 1% .

• The margin will therefore be 200 * 000% = 1 euros.

The margin serves as collateral for the broker. In the event of a loss, the margin ensures that you have enough to pay. But the variations can be very rapid.

How to Calculate Margins?

Calculation of Required Margins

A good calculation of the margins allows the trader to determine the leverage effect which will be necessary for him to take a position. It also allows him to estimate his potential losses or gains on a position.

• Initial Margin = (Position Open Price X Trade Volume) x Initial Margin Percentage.
• Maintenance Margin = (Position Open Price X Trade Volume) x Maintenance Margin Percentage.
• Cash or free margin = account balance – used balance +/- realized losses or gains.

Margin or leverage?

Often novices ask, "What is "Leverage in the stock market?" It's the same thing as la margin. 
The broker has the necessary funds and you can group together with him to trade on a lot of 100 euros. You have the right to buy CFD margin on his investment. You are entitled to top up with 000% of the total value.

A margin is a division.

A lever is the same! You are “short” 99 euros to trade a lot of Forex with your meager 800 euros. So you have to complete. The broker will then multiply your 200 euros by 200 = leverage x500.

A lever is a multiplication.
But it amounts to the same: 
You noticed that

• 200 * 500 is 100 and that 

• 0,2% * 100 is 000.

But multiplying by 0,2% is like dividing by 500. 

• 200 * 500 = 100     leverage x500 on your capital of 200 euros

• 100 / 000 = 500     margin of 0,2% to be paid on the batch of 100 euros

It's just a matter of perspective. Traders use the term leverage more often. But now you know it means the same thing.

Key Concepts of Margin Trading

In the jargon of margin trading, it is essential to understand certain recurring terms that come up time and time again. It is not possible to discuss margin trading without discussing terms such as initial margin and maintenance margin. Among the most important, we can cite:

Margins and leverage

The margin is a fraction of the trader's capital that the broker retains as collateral to cover the risk taken by the trader. However, it is returned to the trader when he closes his position. Gains or losses are then charged to the trader's account when the position is closed. We can therefore distinguish:

• The initial margin: this is the amount the trader must have in their account to open a position; it is also called the deposit margin. If prices do not move in line with the trader's predictions, they will no longer be able to maintain the open position.
• The maintenance margin: this is what allows you to keep your position open when prices are not moving in the direction of your forecasts. Sometimes the amount in your account is no longer sufficient to maintain the position, and the broker then makes a margin call.
• Available funds or free margin: also called available margin, this is the margin on which the trader can still invest. It is the amount of money available in the account with which the trader can open new positions. It is simply the proportion of capital not yet allocated.
• The margin call is therefore the amount required by the broker to continue to cover a position.

Leverage on the other hand is borrowed money to be used to offset the necessary margin. On the markets, it is the Federal Reserve Board of the United States that regulates the treatment of leverage and margins in order to maintain the stability of the monetary and financial system.

What is a PIP in Forex?

Un PIP (a point in percentage) corresponds to the smallest possible change in your position. The value of a pip depends on several factors: the batch price and valeur of the EURUSD pair. 

You have to calculate the PIP in order to include it in your trading strategy. 

Calculation of a PIP

Indeed, depending on the size of the PIP and your available margin, a position can quickly be in margin call .
PIP calculation formula: 

0.0001 * lot number * face value of the lot.
The EUR/USD pair is worth 1,1641 usd. It will be worth 1,1642 if it takes a PIP.

• This means that each variation on this position will be 8,46 euros in your portfolio
• If your margin on this order was 0,2%, you have 200 euros of margin. 
• If the euro loses 23 points against the dollar, you will have 23 * 8.46 = 203.04 euros of losses. 
• You will therefore be on a margin call.

A variation of 1 pip corresponds to a variation of 0,01% on the EUR/USD. But it causes a variation of 5% on your balance. 

Knowing the value of the PIP makes it possible to anticipate the margin call.

The margin bears your losses in trading. If your losses exceed your funds available , this is the margin call.

Available Margin

When you put 1000 euros in your account, you have 1000 euros of available margin , also known as free margin, for trading Forex.

This margin is said to be available because it is not yet immobilized. It can allow to open positions. It can also be used as a buffer.

How to Calculate the Available Margin?

You have 1000 euros. You want to trade Forex. 
A position on a lot of 100 euros costs 000 euros with a leverage x200.

• You need 200 euros of margin . You are exposed up to 200 euros. This money is locked in a position.

• You have 800 euros left of available margin . These 800 euros can still be invested.

The 200 euros of margin are immobilized in the position in order to absorb any losses. This margin therefore serves as a guarantee.

• Balance: 1000 euros 

• Margin: 200 euros

• Available margin: 1000 – 200 = 800 euros

La available margin This margin can be used to open other positions. The available margin is calculated automatically by your Metatrader 4 and Metatrader 5 platforms. 

You will also find indications such as your margin level. The margin level in trading allows you to see the influence of other positions on your portfolio.

MT4 and MT5 offer Forex trading services. On the MT4 platform you will find the margin available under the name of free margin .

Initial Margin

La Initial margin is the minimum margin amount required to open a position. It is also called Deposit margin. Imagine that investing is a staircase; the smallest step you can take is a step. You can climb the staircase by two steps, by three steps, but never by half a step.

The initial margin is the size of a market for a given product. The amount of this margin must always be available in your account, in the form of money or winning positions. If you do not have the initial margin amount, you will not be able to open this position.

This size will vary depending on the product value and leverage value (or margin ratio).

Initial Margin Calculation

When you open a position, you must have at least the initial margin amount in your account in order to secure your trade. 
product value / leverage level
Let's take the example of the lot at 100 euros.

The highest leverage your broker can offer is 500. 

The initial margin = 100 / 000

The initial margin for this position is 200 euros.

If your balance drops below 200 euros, you will not be able to open this position. 

To familiarize yourself with these new concepts, create a demo account . So you can test in real conditions.

To open a position you must therefore have an initial margin that covers the amount of margin required. 

And while this position will be open, the broker will check as it fluctuates that you have enough maintenance margin . 

Maintenance Margin

What is a maintenance margin?

We talked about the initial margin . The maintenance margin corresponds to the initial margin but throughout the trade. From opening to closing. The initial margin, it only intervenes at the opening of the trade.

Indeed, the value of your position will fluctuate. If it loses value, you will have lost money. It will then be necessary that the rest of the balance of your account is sufficient to cover the maintenance margin.

If you want to keep your position open, you must have the Maintenance Margin amount in your account. Either in contracts Positive CFDs, that is, winning trades that you have not yet closed, either in cash.

If you are unable to cover your losses and cover the maintenance margin, the broker will liquidate your other positions, or even your entire account, to cover the losses: this is the liquidation .

Liquidation and margin call are the trader's dangers. You are sailing in troubled waters, and your canoe is dangerously exposed. If you want to avoid sinking, check out our article on margin call.

How to Calculate the Maintenance Margin? 

You have 1000 euros in your account.

If you opened a position of 100 euros with a leverage of 000, you have 100 euros of margin. (1000 * 100 = 1000)

• If this position loses 0,5%, you will have lost 500 euros. 

• Your margin = 1000 – 500 -> 500 euros. 

• However, the position is worth 99 euros, so the maintenance margin required is 500 euros. You are missing 995 euros. 

• If you only had 1000 euros in your account, you are now on a margin call. 

• But if you have 495 euros in your account, you can keep this position open. This is the maintenance margin. 

If your balance is less than the maintenance margin, you will be obliged to add money to your account or risk seeing it close: this is a margin call . 

What is Margin Level?

In Forex trading, the margin level is the ratio of your margins to your balance. It allows you to see if the proportion of money in your account is spread over the balance, which can be used to provide maintenance margin to a losing position, or if your money is already committed to other positions. 

• If your maintenance margin is above 100 (it's a percentage), it means you're safe, although you could still risk a margin call if you don't use a stop loss.

• If your margin level is between 100 and 0, then your exposure is dangerous. You should be careful to reduce your exposure.

How to Increase your Margin?

If you are sure that you are not looking to increase your margin in accounting, then you have different ways to have more margin in trading:

• Monitor Margin Level on MT4:

The margin level allows you to ensure that you always have enough margin available to avoid the risk of a margin call. The margin level is calculated automatically, but you can find its formula in the chapter: "What is the margin level?"

• Close Positions: 

By closing positions you get the latent gain, if there is one. But above all, you Recover the margin you had tied up. It's a bit like getting your deposit back after a rental. Furthermore, this position no longer carries volatility risk. It's therefore a This reduces the risk to your portfolio and potentially lowers your maintenance margin. This is reflected in the margin level, which increases when you close a position.

• Have Winning Positions:

Even if not closed, winning positions add to your balance. How ? well the latent gains, ie the money you have earned in addition to your margin, are calculated in real time to add to your portfolio the money you would earn if you sold the positions.

• Simply inject money. 

If you have more money on your platform, without placing them in positions, you can trade serenely. The money you trade with in your account should be 2% of your capital.

What are the Profits of Margin for a Trader?

The margin is used to absorb losses in the market.

When you open an order on a lot of EURUSD, you only pay 200 euros of margin. 

But the PIP is 10 euros. A movement of 100 points represents 1 euros. 

With 200 euros, you can therefore win or lose 1000 euros. 

However, you only contributed 200 euros of margin. So you can earn more than what you invested. 

What are the Risks of Margin for a Trader?

You may lose more than you invest.
If you are losing 1000 euros on a position at 200 euros, you will have to pay the difference, that is to say, add 800 euros.

If you buy a stock for 100 euros, you can't lose more than 100 euros. With margin trading, you can open a position with 200 euros but lose 1000 euros. So you can lose more than you originally invested. You can get into debt. 

Margin absorbs your losses if the market moves against you, but you can see that a margin of €200 won't be able to absorb the losses of a €100,000 lot. That's why you may need more margin.

Your account balance allows you to account for losses on your positions.

We can compare this with a real estate loan

You want to buy a house for 100,000 euros.
But you only have 200 euros. The bank will lend you the remaining 99,800 euros.

In return, the house will serve as collateral: if you can no longer pay the monthly installments, you will have to sell the house to the bank. 

But the important thing is that you will enjoy a house in its entirety for 0,2% of its price.

In a mortgage, you don't sell the house to get a capital gains after a few hours. In Forex trading, leverage is used to buy assets with a high value and with a high liquidity.
You can't trade from home. But you can trade Forex.

In a margin trade, the broker will lend you €99,800. Since you don't have a house to mortgage, the money you have with the broker (balance + your winning trades) will serve as collateral. And you only have a margin of the price to invest. 

But the important thing is that you now have access to a position of 100,000 euros.
Your profits and losses will be on the entire position, not just the 200 euros.
Margin also takes into account your winning positions, and you can cover your losses with your winnings. This allows you to implement diversification strategies to protect yourself.

To conclude

Now you know how Forex trading works for professional or private traders.

• CFD contracts are worth 100,000 euros
• A position may cost as little as 200 euros, but it exposes you to the fluctuations of a 100,000 euro asset.

The operation of margin is only the first step in an art that goes with trading: the money management .

Trading and money management are like Yin and Yang. Trading allows you to make money, money management prevents you from losing it. 

Knowing everything about margin trading is crucial; it helps you plan your stock market transactions with greater confidence. It's important to know what it is and, above all, to understand the concepts surrounding the notion of margin trading. It's an investment technique frequently used by successful traders. 

What is Margin in Trading?

Margin trading is a trading technique that involves purchasing financial assets using leverage. It's a method of trading using funds provided by third parties. This trading method is very common in Forex. It allows traders to amplify market results by giving them the opportunity to invest more capital than their accounts contain.

In the jargon of margin trading, it's essential to understand certain recurring terms that come up time and time again. It's impossible to discuss margin trading without discussing terms like initial margin and maintenance margin, for example.

Some Key Concepts of Margin Trading

Margin is a fraction of the trader's capital that the broker retains as collateral in order to to hedge against the risk taken by the trader. However, it is returned to the trader when they close their position. Gains or losses are then credited to the trader's account upon closing the position. We can therefore distinguish:

Margin Trading – The Initial Margin

This is the amount that the trader must have in account to open a position, it is also called deposit margin. If the prices do not move in the direction of the trader's forecasts, the trader will no longer be able to hold the open position.

Margin Trading – Maintenance Margin

This is what allows you to keep the position open when prices do not move in the direction of forecasts. It happens that the amount in the account no longer allows you to keep the position open, the broker then makes a margin call.

Margin Trading – Cash or Free Margin

Also called available margin, this is the margin the trader can still invest. It is the amount of money available in the account with which the trader can open new positions. It is simply the proportion of capital not yet allocated.

Margin Trading – Margin Call

This is the amount required by the broker to continue covering a position. Leverage, on the other hand, is borrowed money used to offset the required margin. In the markets, it is the US Federal Reserve Board that regulates the treatment of leverage and margins in order to maintain the stability of the monetary and financial system.

How to do Margin Trading?

To trade on margin, the investor must open a margin trading account with the provider. Unlike a traditional trading account, this will allow them to trade assets with values ​​greater than their account balances.

After opening the account, the investor and the broker then enter into agreements to define the terms of the margin trading account. These terms typically concern initial margins, maintenance margins, or minimum margins. They also address the terms relating to the risks the provider must take on their positions.

Margin trading is a rather aggressive trading method. It represents a higher risk for the trader and therefore requires a thorough understanding of its principles. The rules and principles surrounding this method are intended solely to help the trader focus their objectives and define their potential gains and losses.

Margin Trading Example

Once you have opened your account, the broker can now endorse some of the capital needed to open a position. For example, if you want to buy shares inApple for an amount of €600 and your broker asks you for 20%, you will have to pay €120. This is the deposit margin or initial margin.

The capital in your account must then be able to keep the position open until the objectives are reached. When you open the position, you set a stop loss level, which is the losses and risks you are willing to take. The value of the stop loss and the deposit margin constitute the maintenance margin. This is what keeps your position open until your position is closed.

If the money in your account is not enough to keep the position open, the broker will ask you to increase the funds. This is called a margin call.

Margin Trading: Cross Margin, Isolated Margin

Margin trading comes in several forms to allow traders to choose how they want to take positions. However, all the adjustments around style are primarily aimed at making the decision about the risk to take more flexible. So we will have:

• Cross margin trading: This is a margin trading style in which the trader has only one account. All available funds in their account are used to cover their various positions. This measure aims to prevent account liquidation, thus eliminating the need for the broker to issue margin calls.
• Isolated margin trading: This is a margin trading style in which the trader allocates a specific amount to hedge a position. If prices do not move as predicted, losses are limited to the amount allocated to the position. However, it is possible to manually add margin when a margin call is made.

What Are the Risks Associated with Margin Trading?

• The risks of losses on capital;
• Premature closing of positions;
• Irrational decision-making in the event of significant losses;
• The increase in margin calls.

Margin Trading – Cryptocurrencies

Cryptocurrency is one of the main financial instruments used for margin trading. While this is a high-risk trading style, the risk is even higher with cryptocurrencies. Indeed, the cryptocurrency market is highly volatile and carries a higher risk. However, it is possible to trade cryptocurrencies on margin thanks to the facilities offered by certain platforms.

Brokers then offer the best conditions for margin trading, and this varies from one broker to another.

Best Margin Trading Fees

Which Brokers Specialize in Margin Trading?

Given its profitability, this trading method is very popular among cryptocurrencies. It's therefore quite interesting to discover the margin trading approach of specialized cryptocurrency brokers. The most common in France are:

Binance: This broker occupies a fairly important place in the cryptocurrency market. With its own crypto, Binance offers fairly easy margin trading.

Kucoin: Like Binance, Kucoin offers fairly easy margin trading. Its trading interface is tailored to the needs of both beginners and professionals. Margin trading is a four-step process.

• Opening a margin trading account: This is different from a regular trading account. It is recommended that you carefully read the risk information for margin trading before opening an account.
• Once you've opened your account, transfer funds from your crypto account to your margin trading account. This allows you to limit your risk to the proportion allocated to your account. You can transfer the cryptocurrency of your choice into it.
•  Then you can borrow funds. The agent transferred from your wallet to your account serves as collateral for the borrowed funds.
• You can then begin trading with the borrowed funds plus interest. Interest rates are updated hourly on platforms like Binance.

When you make a profit, you repay the borrowed amount plus interest. If you make a loss, it will be covered by the capital in your account. If the capital is no longer sufficient to cover your losses, the broker will ask you to increase your funds; this is called a margin call.

Avantages and disadvantages of Margin Trading

Margin trading is a style of signals rather peculiar. It has many strengths, but also weaknesses. It is therefore not recommended for novice traders for various reasons, including risk exposure.

1. Thevantages of Margin Trading

The avantageThere are many advantages to margin trading, including:

• These trading accounts allow for the generation of very significant profits; this is one of their main advantages.vantages.
• They allow traders to diversify; with these accounts, they can open positions on multiple sides of the market.
• With margin trading, It is possible to invest in significant assets with a small amount of capital.

2. Disadvantages of Margin Trading

Just like he has avantageYes, margin trading has some disadvantages that you should consider before you start. The disadvantages include:

• The main drawback lies in the loss ratio a margin trading account can generate. Indeed, the more it allows you to increase your profits, the more it allows you to increase your losses if the market moves in the opposite direction. For this reason, it is not recommended for novice traders. However, we advise professional traders to have a good foundation in risk management.

Conclusion – Is Margin Trading Recommended?

Although highly profitable, margin trading is a form of trading that carries significant risks. Proper risk management is therefore essential for successful margin trading. It's important to note that margin trading comes in several forms, and it can now be found in both cryptocurrency and CFD markets. The best broker for this type of trading in France that we can recommend is Ava Trade. This broker offers a minimum deposit accessible to all, in addition to significant leverage and a low margin call rate.

A little history !

Margin Call for Dummies: Why do we say it's a "call"? This name comes from a financial tradition. Back when the stock exchange was still a building with large stone columns, information circulated in this building, and brokers at the Paris Stock Exchange would literally call their clients to notify them of a margin breach.

Today, all that remains of this tradition is the phone call. And, in most cases, the call is replaced by an email.

The margin call was popularized by the film Margin Call, AppleIn this film, it's the bank Lehman Brothers, which was facing it. And we know what happened next: in 2008, the crisis of subprime will cause the bankruptcy of the century-old bank.

If it was a death sentence for the bank, it was also the case for many traders.

What is a Margin Call in Trading?

By misuse of language, we refer to it as a place. It's the dead zone for traders. We are "in" a call on a position.

A margin call occurs when the account's exposure exceeds the balance. It's like betting on 10 houses, confident of winning.

But you lost. So you're in debt. You have two options: pay for 10 houses and get away with your losses, or start again with 20 houses.

Example of Calculation in Forex:

You have 1000 euros in your trading account. You open a position on Forex, with a leverage 500.

Price of a Forex position = 100,000 euros per position.

Required margin = 100,000 / 500 = 200 euros.

So you have 200 euros of margin on this position, and 800 euros remaining on your balance.

If your position is losing 1%:

100,000 * 1% = 1000. Your margin = 200 – 1000 = – 800.

Forex maintenance margin = 800 euros.

You need a margin of 800 euros to maintain your Forex position

In the world of trading, you have two choices:

• Either you close your position and settle your €800 debt with your account balance. You lose €1000, but your position is closed.
• Either you inject your 800 euros of margin and keep your position open. You can wait for the price to rise and hope for a profit, but you also expose yourself to further declines.

Option 1: Close your Position

• Advantage:

If your position is in margin call, you must know when to close it and not try to "recover" like in a casino. Your bet wasn't a winner, your market analysis wasn't accurate, your trading strategy wasn't optimal.

It is important to know how to question yourself in order to be able to triumph later.

• Of hisvantages:

You're going to suffer significant losses, and that could mean the end of your trading account. Don't panic: everyone faces a reversal of fortune like this. Watch Ray Dalio's story on YouTube if you need inspiration!

Option 2: Cover the Margin Request

· HASvantages:

In some cases, a margin call is triggered by a sudden market movement that is only temporary. By covering the required margin, you don't lose money if the position ends up winning. It's just money that ensures you can afford to close the position at the current price. But as the famous saying goes: as long as it's not sold, it's not lost.

· Désavantages:

If the position continues to lose, you continue to lose money. Continuing to fund a margin account may result in losses even beyond the reinvested margin. You may risk going into debt.

If you persist in holding positions that are too far in the red, you risk putting your trading account at risk. Margin calls can come in cascades, and selling losing positions results in losses that will worsen your margin level and cause even more losses.margin calls.

Definition

What is the point of this mechanism that some trading accounts face? It's an insurance premium.
If you opened a €100,000 position on Forex or any CFD, with leverage of 500, you have €200 of margin. This margin is intended to cover losses.
The broker assumes that you have the potential to lose. Therefore, it asks you to anticipate a loss of 200 euros in order to be allowed to open the position.

The position isn't considered lost until you sell. However, the broker always considers the potential gains and losses if you were to sell the position, in order to assess your creditworthiness.

A margin call occurs when you are no longer solvent. That is, if you were to sell everything at that moment, you would not be able to cover your losses with the margin deposited as collateral when the order was opened.

This is what happened to Lehman Brothers. They were insolvent. They tried to liquidate their assets quickly to limit losses. But the process accelerated their decline.

For you, if you receive an email from your broker telling you that you are in margin call, this can have two meanings.

This may concern a single position, in which case your broker will ask you to pay a maintenance margin to be able to keep this position open.

This mechanism is detailed in depth in our article on margin trading, which is aimed at beginners and professionals alike.

But the situation can be more serious and affect your entire account.

Example:

If your If your margin level is below 0, you have more losses than gains. And you won't be able to recoup your losses even with all the money in your trading account.
If you don't sell, you can wait for the price to rise. No sale, no loss again.
But the broker isn't there to gamble. Leverage means the broker participates in the trade with you. They lend the money needed to complete your position to reach the volume you trade when you use leverage. But you bear the risk in case of losses. The broker remains financially neutral.

So if the broker detects that you are insolvent, it means that they risk not getting back the money they lent you. They will therefore close all your positions, reimbursing your losses with your profits and balance. If that's not enough, they may consider you to be indebted to them.
It's like having your bank account overdrawn.

Let's go back to the Detailed Mechanism

It is important to understand that the call can be more or less violent depending on the margin level and of The level of leverage used also depends on price fluctuations.

However, it doesn't depend on the order type. Whether it's a long order (buy position) or a short order (sell position), it's the loss of money that causes your broker to request additional margin. To learn about short selling and short positions, click here.
Your leverage because the margin you deposited depends on your leverage.
If you deposited 0.02% of the price as margin, which corresponds to 500x leverage, you risk losing your position with every move against you. Whereas with 1x leverage, your margin corresponds to 100% of the price. Technically, you can never be on margin call.

But you'll never be able to place an order on Forex lots of 100,000 euros with leverage of 1. However, you can do so with gold or stocks. If you're interested in derivatives trading, check out our article on CFDs.

If the price variation is This is huge; your margin level will have time to fall below zero before your broker intervenes. They will act quickly and in a way that prioritizes their own protection. He will close your winning positions until he recoups his investment.

What are Financial Derivatives?

In finance, there are two ways to invest: you can either buy the asset directly, such as a stock. Or you can bet on the price of an asset, without owning it. In this case, you're not buying anything; you're betting on whether it's going up or down. When you bet on the price, you use financial products that mimic asset prices.
These products are called Derivatives. They are extremely common in the world of finance.

How is the Margin Call for the Different Financial Products?

Whatever the Financial products, Futures, shares, CFDs, margin calls work on the same principle: trades represent risks, and you must pay a counterparty.

• On Forex, The deposited margin covers losses up to a certain threshold.

• In the over-the-counter (OTC) market it is the collateral which This is the counterpart to the risk taken. While the names may change, the definition remains the same: to insure the risk at the same amount.
• In the futures market, margin is calculated daily and constantly adjusted based on the contract's various parameters. To learn all about the specifics of futures contracts, visit our detailed article. Futures are special contracts to buy or sell an asset at a predetermined price and date in the future.

What is the Clearing House?

Definition

When you trade, whether CFDs, futures, or options, you're betting against someone else. When you buy a stock on a regulated market, you're buying from someone else. The broker is simply the middleman; they simply execute what the clearing house requests. You may feel like you're betting against your broker, but in reality, you're betting against other traders.

However, to ensure the exchanges, there are organizations, called clearing houses, which will have the role of sole intermediary for each trader.
The clearing house will take care of collecting losses and distributing profits to traders. It calculates margin calls, for example.
In the case of the over-the-counter market, also known as the OTC market (over the counter) the exchanges are called bilateral. There is no clearing house. As a guarantee of trust, to ensure investors take risks, the buyer and seller will exchange assets, securities or even cash. This is called collateral. However, the value of this collateral varies.

Example

Let's say you have 1,000,000 euros worth of ABC shares as collateral. You have 1000 ABC shares worth 1,000 euros each.

If your stock price drops to €500 per share, then you only have €500,000 as collateral. You must therefore either add 1000 ABC shares, add €500,000 in cash, or add €500,000 worth of shares or securities.

The Monetary and Financial Code considers the clearing house as a credit institution.

Volatility in the futures markets is extremely high. The clearing house makes daily margin calls when you enter into these types of positions. The margin is calculated at the close of each trading day to verify your solvency. If there is no response, the position will be immediately closed.
Futures Market: The futures market refers to the entire market for traded assets. before their delivery. This is, for example, the futures market. In this case, the price of an asset, such as wheat or oil, is negotiated before its delivery. This allows the farmer to have a price agreed upon in advance for their wheat, which they will sell at harvest time.
This way, the clearing house ensures that you will be able to hold your position the next day.

This entire market system relies on tangible evidence of trust, such as money (margin) or Financial securities (collateral)

How to Calculate?

The calculation performed by the clearing house is quite simple. You should think of your trading account as a balance sheet between assets (profits, balance) and liabilities (margins, losses).
To take the bank account example, assets are money coming in, liabilities are money going out.
You understand that if your expenses exceed your income, you're in the red. When you're overdrawn on your bank account, think of it as a losing position, and the amount you deposit into your bank account is a margin call.

What are the key Margin Level Thresholds?

The key margin level thresholds are:

– 0. This corresponds to a margin level of 0%. This is not an attractive position because you have no margin of protection in the event of a bad stock market movement. Indeed, as soon as you have more liabilities than assets, you can no longer repay your debts. You are therefore insolvent in the eyes of the clearing house.

– 100: Your account has a ratio of 1 euro of liabilities for 1 euro of assets. If you have a ratio of 100%, this means that you have enough in both earnings and balance (assets) to cover your exposure.
So you are protected in the event of sudden movement.
Beyond this threshold, you can trade with peace of mind. Although margin levels are an indicator that should be kept in mind at all times, if you're above 100%, there's no reason to worry.

Margin level calculation: balance / margin * 100%

And what happens if the Margin Level drops below 0?

If your margin level is negative, it means your account is in the red.

Let's go back to the image of the balance between positive and negative assets. If at 0 you have exactly the same value of positive assets as negative assets, then below 0 you start to have negative assets that are worth more than all your positive assets.

Normally, a margin call occurs at this point to protect your trading account and prevent it from sinking into abysmal depths, as this would leave you in colossal debt.

But the margin call isn't always triggered immediately, especially if volatility is high. Often, it's triggered a little after you've crossed 0.

The portion between your margin level and the return to balance, the difference between your negative margin level and 0 corresponds to what you lost in addition to everything that was in your account.

How to Calculate the Impact of Leverage?

Leverage has a direct impact. It's impossible to be in margin call mode when you don't use leverage: if you buy an asset at 100% of its price, you can't lose more than you invested. Profits are limited, but the loss will never be greater than the price paid when the order was placed.

With leverage, you only pay a margin of the price. This margin covers you for a certain range, but beyond that, you must add more margin if you want to allow more range.

The call therefore occurs when the losses are greater than your margin. Now this margin is defined at the time you execute the order: when you choose your leverage you define the margin.

The higher your leverage, the lower the margin required for the same asset. Therefore, high leverage protects you less. You only have a tiny fraction of the price as collateral.

But, with a low leverage, you have a solid guarantee.
However, this will limit and will slow down your earnings.

What is Collateral in Trading?

This is what you put up in return for your losses or risks. Your profits in your trading account are used as collateral for your losses. When you take out a mortgage, the house is used as collateral: in the event of default, the bank seizes the house to repay your debt.

Collateralization opens the field to all diversification strategies and protects against margin calls.
In fact, in diversification, there are two points.

The first is to have a portfolio that protects itself in the event of a crisis.

With one part experiencing the crisis and the other part being uncorrelated, it behaves in the opposite way. When everything goes down, it goes up. Like gold during the COVID-19 crisis in 2020. Graphic image illustration

This first point is of interest to savings, the long term, or the seeking gains.

The Second Aspect, which is closely related to the First, is that the Gains will Collateralize your Losses.

This means no margin issues, no closing positions in the event of a market storm. Because "after the rain comes the good weather": crises often last only a short time, and the price quickly recovers. But if you tell the broker that, they'll laugh and ask you for additional margin.

Whereas if your portfolio supports the additional margin needs and punctual, so your portfolio weathers the crisis without having to sell any positions.

Now you know everything about theMargin call. Margin is a Insurance for the broker. And the clearing house calculates the price of this insurance proportionally to stock market fluctuations. If the price increases, you'll be responsible for it. It's up to you to always ensure your account is balanced.

What is Margin Call – Definition

Margin Call – Definition: A margin call is the capital required by a broker from the trader to maintain their open positions. If the trader fails to deposit any capital into their trading account, the broker will close the positions.

The margin call is therefore an alert letting the trader know that they are at the limit. The broker will then ask the trader to make a payment to keep their positions open. But if the margin level is not increased, the trader will not be able to open new positions on their account.

So, when a trader receives a margin call from their broker, they must address it by either increasing their capital or closing some open positions to free up margin. But if the trader doesn't react, the broker will automatically close the losing positions to avoid a negative balance.

Synonym of Margin Call

Margin call is synonymous with the following terms:

• Margin Call,
• Margin Requirements,
• Call for Funds.

Best Brokers that Apply Margin Call

Etymology Call of Margin

Margin call is composed of "Call" and "Margin." Call is the act of claiming, and Margin in finance means Profit.

Terms Related to Margin Call

Here is a list of definitions related to Margin Call:

• Financial Margin Definition: In finance, margin means profit or the difference between products and expenses.
• Profit Margin Rate Definition: The profit margin rate is a portion of the profit obtained from the sale of a product. To calculate it, the following formula must be applied: profit margin rate = purchase price (excluding VAT) x 100.
• Margin Call Definition: Margin Call is a synonym for margin call. Having the same definition as margin call, this English translation appears in finance glossaries.
• Margin Call Leverage Definition: A margin call leverages a position opened using financial leverage, i.e., borrowing money to invest more than the available amount in a trading account. The margin call then informs the trader that their funds are insufficient to maintain an open leveraged position.
• Public Offering Definition: Public offering is an English term referring to a public offering of securities. This term appears in the financial lexicon, as do the English definitions of margin call.
• Forex Margin Account Definition: A forex margin account is defined as a special account opened with a broker that allows the use of leverage on capital. It is through margin accounts that individual investors or traders gain access to the Forex market.
• What is the Margin – Definition: The margin is the difference between a selling price and a cost.

What is Collateral Margin Call – Definition

A collateral margin call is the sum of collateral flow exchanges made when stocks revalue. These margin calls are calculated based on the elements determined in the contract and the market. The purpose of this call is to address sudden changes in the value of the contract or the asset in question.

What is Required Margin – Definition

The required margin is an indicator that allows the trader to know the amount required on his trading account. This will help him to maintain his open positions. The required margin is automatically generated when a trader opens a position on a trading platform.

And since the trades are carried out using leverage, the required margin is a kind of margin call. In effect, it acts as a good-faith deposit to keep the positions open. Also, if the trader's capital falls below the required margin level, all or just some of the positions they have opened will be closed.

What is Margin Call in OTC Market – Definition

A call on an over-the-counter market is a deposit paid to a broker for each transaction in this type of market. The amount of the deposit depends on the broker's requirements and the financial product being traded.

To determine the required margin deposit when opening a position, the broker recommends the required margin, also known as the margin used or margin cover. Therefore, if the trader's account equity falls below this margin deposit, a margin call is required.

To calculate the margin deposit amount, the broker may also refer to the available margin. This is a margin that corresponds to the remaining amount of collateral that the trader has before the margin call.

It is the broker who issues the margin call to the trader via email, which suggests the broker fund their trading account to avoid closing their positions. A negative response to the margin call means that the trader's positions are continuing in the wrong direction. Therefore, the broker will close these positions to avoid a negative balance.

Note that margin calls are not mandatory. A sudden drop in the balance forces the broker to cut the investor's positions, which will protect them.

What is a Margin Call on a Regulated Market – Definition

Margin calls on a regulated market are trading processes controlled by a clearing house. It ensures that transactions are completed successfully until their due date. The role of the clearing house is to ensure that transactions are completed on time.

In fact, the clearing house is an institution that mediates between the buyer and the seller. It is particularly concerned with:

• Link the debit and credit positions of participants;
• Clear balances,
• Make margin calls.

In short-term markets with rapidly changing prices, clearing houses make frequent market calls. This is done to cover an investor's margin deposit against a significant change in the market price.

When the market closes each day, traders' positions are liquidated. But if there are unrealized losses, the clearing house will make a margin call with the trader to replenish their margin. This additional payment often comes in the form of cash or securities.

To calculate this call, you must use the settlement price. This is a price obtained after the close of each trading session or at each contract option expiration.

Margin calls on regulated markets are made daily to reduce the risk of hedging the next day. This also allows the trader to demonstrate that they have the means to maintain their position.

In the event that the account does not have enough balance to satisfy the call, the broker has the right to liquidate the entire position or just a part of it and use the margin deposit to cover the call.

What is Margin Trading – Definition

Margin trading is a type of trading that allows traders to invest with very little capital. It also allows for leverage and better position sizing.

To practice margin trading, you can register with the best brokers of the moment such as Vantage.

What is Margin Call Level – Definition

The margin call level is a threshold at which the broker will initiate a margin call. This threshold occurs at a margin level of 100%. In concrete terms, a margin level of 100% represents the entire amount available in the trading account. This is while taking into account unrealized losses, which are equivalent to the margin the trader uses to open their positions.

The margin level is calculated by applying the following formula:
Margin Level = Capital / Used Margin x 100.
But in practice, the margin level is calculated automatically. To see it, simply check it on trading platforms like MetaTrader 4 or MetaTrader 5.

How to Calculate a Margin Call?

Margin calls are not calculated. However, investors can monitor their margin levels using various trading platforms. When this level falls below the threshold announced by the broker, the broker will automatically close the trader's open positions.

What is Margin Call Maintenance Margin – Definition

A maintenance margin is an amount required by the broker for the trader to keep their positions open. When the margin level falls below the maintenance margin threshold, the broker will immediately close the position to bring the account up to the margin requirements.

If the trader has many open positions, the broker will close the positions with the biggest losses.

The broker itself determines the margin and maintenance margin threshold. Typically, the maintenance margin level is 50% for retail traders. For professional traders, this level will be 30%.

So, when a broker requests margin, we can consider this as a signal from the broker that the margin requirements are not being met. However, the maintenance margin is a level that should be considered a limit. If it is exceeded, the positions will be closed.

The broker usually closes losing positions to avoid ending up in a negative balance, a dangerous debt situation for the trader.

What is Available Margin or Free Margin in Margin Call – Definition

Available margin or free margin is a margin that, as its name suggests, is still available for investment. It is the capital of money still usable in an investor's trading account allowing them to open new trading positions. When the trader has not yet opened a position, the free margin will then be the total margin, or account balance.

In the case where several positions have been opened, the available margin is obtained by calculating:
Free Margin = account balance – margin used + gains or – losses of current positions.

Conclusion on the Definition of Margin Call

What you need to remember about this article regarding the definition of margin call:

• Margin call is a payment that must be made to a broker for the over-the-counter market to maintain open positions;
• In the case of a regulated market, the margin call must be settled with the clearing house;
• Margin call is an alert that helps avoid negative balance

Now that you know the definition of margin call, you can better manage it and avoid losses. To limit losses and better understand margin trading, we recommend starting by trading with a demo account with a broker.

How to Calculate Margin in Trading?

Calculating margin is simple. It's the percentage of a position's price that a trader must pay on a leveraged trade. For more details, see our article on Margin in Trading.

What is a Rate SWAP in Finance?

SWAP stands for exchange. There are two types of rates: floating rates and fixed rates. An interest rate swap involves exchanging a floating rate for a fixed rate, for the same amount of debt and with the same maturity. In this case, the margin and margin call help regulate the SWAP market, which is particularly volatile.

How to Calculate Margin Call?

The margin call amount is calculated automatically. When the maintenance margin is lower than the required rate, the broker asks you to add the difference.

The Margin Call for Dummies: Going Further

To learn more about margin calls, you need to delve deeper into concepts such as leverage and margin. In Forex, margin is a portion of money deposited to open a position. This margin is also present on futures contracts. Beginner traders do not have access to short position trading (short selling). However, you can practice Forex margin calculation exercises with the margin calculator and demo account.

Which Broker Should You Choose to Avoid the Margin Call?

Our trading community particularly appreciates the following brokers when they want to trade the markets safely: Vantage (for its welcome bonus and leverage), eToro (for its simplicity) and DEGIRO (for its advanced trading tools).

Have you ever faced a margin call? Share your experience and leave us a comment!