Margin Call - What Is Margin Call? We Answer How to Avoid Problems
Margin trading comes with a range of potential benefits, but it also involves some additional risks. One of the most important ones that you must understand fully is margin calls. It's basically your broker’s demand that you need to increase your account’s equity amount. Each broker comes with discrete rules regarding their offered margin account and when you need to increase your account’s equity amount varies from broker to broker. The most common reason for margin calls is high leveraged trading.
It’s important to bear in mind that not all brokers inform you that additional equity is required. Moreover, your brokerage might also take necessary actions in order to increase your account's equity, and the company can choose and sell whichever positions without taking tax and financial obligations into account. That's why it's critical to thoroughly understand how margin calls are triggered and how you can avoid them. This article contains all the information that will allow you to understand margin call meaning in detail. So, let’s dive into it.
What Is a Margin Call? Definition
Generally, a margin call is a warning or indicator from the brokerage that the balance of one or more securities (that you opened by borrowing the money) in your margin account has fallen too low in value. In other words, the value of the equity in your margin account is no longer enough to meet the broker’s margin requirements. When a margin call takes place, you as an investor need to add securities or money to your account. Additionally, you can also sell some of your assets if possible that you’re holding on your account to resolve the margin call.
When Can You Get a Margin Call? Examples
Here are some real-life examples that you can go through in order to understand the concept of margin call better.
Margin Call Example 1
Now let's take another simple example where you decide you purchase 10,000 shares of a certain company. The price of a single share is 5 US dollars, so you'll be needing 50,000 US dollars in total. But you only have 50 percent of the required amount in hand. So, you decide to borrow the other 50 percent from your brokerage. But the value of the share drops by 25 percent, which is also the minimum maintenance margin requirement from the brokerage. Then you might receive a margin call from your brokerage.
The brokers make a margin and demand additional funds in your margin account in order to keep you from defaulting on the borrowed money.
Margin Call Example 2
Let’s discuss the real-time example to understand how the margin calculation works. Assume that being an investor, you buy stocks that are worth 10,000 US dollars by utilizing 5,000 US dollars of your cash and 5,000 US dollars of margin. But unfortunately, the securities that you bought decreased to 7,000 US dollars. So, the equity percentage will be:
7,000 US dollars (current value) - 5,000 US dollars (the amount you borrowed) = 2,000 US dollars (your equity)
2,000 US dollars (your equity) / 7,000 US dollars (current value) = 0.28
The Equity percentage will be:
0.28 x 100 = 28 percent
As you can see, the calculation above shows that your equity percentage has dropped to 28 percent.
But according to the rules and regulations of your brokerage, you must maintain a minimum margin amount of 30 percent in your account. But your equity percentage is less than that. Therefore, the brokerage will issue a margin call, and you'll need to deposit the following amount to your account:
7,000 US dollars (current value) x 0.30 (required minimum percentage) = 2100 US dollars
2100 US dollars (minimum equity requirement) - 2,000 US dollars (current equity amount) = 100 US dollars
As the above calculation shows, you’ll need to deposit 100 US dollars of additional funds to your account in order to satisfy the broker’s demand.
What You Should Do in Margin Call Situation
One critical factor which is associated with all types and styles of trading and can never be fully eliminated is “risk." A margin call is probably the most important one in margin trading and if you receive it from your broker, then consider following the practices mentioned below to satisfy the demand.
Deposit Additional Funds Immediately
The first and the most obvious way out is depositing additional required funds to your margin account immediately. Bear in mind that you must do it by the due date if you want to satisfy the margin call. Otherwise, your brokerage will have the full rights to sell one or more of your securities without any prior notification.
Liquidation of a Position
Liquidating one or more of your positions in simple words means selling securities such as bonds or stocks. In return, you receive cash that you can use to satisfy the margin call.
Deposit Stocks in Your Account
Some brokers allow you to deposit stocks into your account. But depending upon the rules of your brokerage, it can take up to a couple of weeks. Contact your brokerage to make sure if the stocks will be deposited before the margin call time expires or not.
Brokers Margin Requirements
Before we get into the details, it’s important to keep in mind that the margin requirements are largely dependent upon the regulations and risk management rules of your broker as well as on the market in which you’re trading. That’s why it’s important to choose the brokerage that offers margin rules which are suitable for your unique trading needs.
Stock Brokers Margin Requirements
Generally, stockbrokers have stricter margin requirements as compared to other types of brokers. Here we’ll discuss the margin requirements of two of the most popular stock brokers.
Interactive Brokers: Stock Margin Requirements
Margin | Rules |
---|---|
Margin
Maintenance Margin |
Rules
25 percent x the value of stock |
Margin
Initial margin |
Rules
25 percent x the value of the stock (100 percent purchase price or a minimum of 2,000 US dollars – the lesser one will be selected) |
Margin
Initial Margin for Reg T End of Day |
Rules
50 percent x the value of stock |
Margin
IRA (Individual Retirement Account) Margin |
Rules
The same amount of the cash |
Margin
Cash, IRA (Individual Retirement Account) cash |
Rules
100 percent x the value of stock |
Margin | Rules |
---|---|
Margin
Maintenance Margin |
Rules
2.50 US dollars per share if the value of the stock is less than or equals to 2.50 dollars |
Margin
Initial margin |
Rules
Same as above |
Margin
Initial Margin for Reg T End of Day |
Rules
50 percent x the value of stock |
Margin
IRA (Individual Retirement Account) Margin |
Rules
The same amount of the cash |
Margin
Cash, IRA (Individual Retirement Account) cash |
Rules
Not applicable |
Webull: Stock Margin Requirements
Security Type | Maintenance Requirement | Initial Requirement | Requirements for Day Trading |
---|---|---|---|
Security Type
Value more than 5 US dollars |
Maintenance Requirement
25 percent x margin value |
Initial Requirement
50 percent x margin value |
Requirements for Day Trading
25 percent x margin value |
Security Type
A value greater than 3 US dollars but less than 4.99 US dollars |
Maintenance Requirement
50 percent x margin value |
Initial Requirement
50 percent x margin value |
Requirements for Day Trading
25 percent x margin value |
Security Type
Value less than 2.99 US dollars |
Maintenance Requirement
100 percent x margin value |
Initial Requirement
100 percent x margin value |
Requirements for Day Trading
25 percent x margin value |
Security Type
ETFs with 2x Leverage |
Maintenance Requirement
50 percent x margin value |
Initial Requirement
50 percent x margin value |
Requirements for Day Trading
50 percent x margin value |
Security Type
ETFs with 3x Leverage |
Maintenance Requirement
75 percent x margin value |
Initial Requirement
75 percent x margin value |
Requirements for Day Trading
75 percent x margin value |
Security Type | Maintenance Requirement | Initial Requirement | Requirements for Day Trading |
---|---|---|---|
Security Type
Value more than 16.625 US dollars |
Maintenance Requirement
30 percent x margin value |
Initial Requirement
30 percent x margin value |
Requirements for Day Trading
25 percent x margin value |
Security Type
A value greater than 5 US dollars but less than 16.625 US dollars |
Maintenance Requirement
5 US dollars per share |
Initial Requirement
5 US dollars per share |
Requirements for Day Trading
25 percent x margin value |
Security Type
A value greater than 2.51 US dollars but less than 4.99 US dollars |
Maintenance Requirement
100 percent x margin value |
Initial Requirement
100 percent x margin value |
Requirements for Day Trading
25 percent x margin value |
Security Type
Value less than 2.50 US dollars |
Maintenance Requirement
2.50 US dollars per share |
Initial Requirement
2.50 US dollars per share |
Requirements for Day Trading
25 percent x margin value |
Security Type
ETFs with 2x Leverage |
Maintenance Requirement
60 percent x margin value |
Initial Requirement
60 percent x margin value |
Requirements for Day Trading
50 percent x margin value |
Security Type
ETFs with 3x Leverage |
Maintenance Requirement
90 percent x margin value |
Initial Requirement
90 percent x margin value |
Requirements for Day Trading
75 percent x margin value |
It’s important to keep in mind that the brokers can change these values and associated requirements without any prior notice. That’s why it’s important to maintain more than the minimum equity amount in your margin account that’s required by your broker.
Forex Brokers Margin Requirements
As mentioned above, the margin requirements in Forex trading depend upon the rules and regulations issued by each broker. But the typical margin requirements by the brokers for Forex trading can be 0.25 to 2 percent. The margin percentage is typically about 1 to 2 percent for an account that usually trades in more than 100,000 currency units. Here we will discuss the margin requirements of two of the most popular Forex brokers.
FxPro Margin Requirements
The margin module that FxPro leverage uses is dynamic, which mainly depends upon the instrument that you’re trading, your local jurisdictions, and the trading platform that you’re using. The most important factor is undoubtedly the local jurisdiction. That’s why you’ll need to use the margin calculator that FxPro offers to calculate margin against your trades.
XM Margin Requirements
The maximum leverage and the required margin of XM broker depend upon the subsidiary of the broker that you’re using, the instrument you’re trading, and your asset classes. The general rules of XM against margin are:
-
The broker sends you a margin call if your account is less than 50 percent, and in order to top up your account, you'll be required to exit some of your positions.
-
If your account balance goes below 20 percent, then the brokerage might start exiting your open positions.
FOREX.com Margin Requirements
FOREX.com is one of the most popular online brokerages for Forex trading. The following table shows the typical margin levels of this broker against the most commonly traded currency pairs.
Currency Pair | Minimum Margin Requirement |
---|---|
Currency Pair
EUR/USD |
Minimum Margin Requirement
2 percent |
Currency Pair
GBP/USD |
Minimum Margin Requirement
5 percent |
Currency Pair
AUD/USD |
Minimum Margin Requirement
3 percent |
Currency Pair
AUD/CAD |
Minimum Margin Requirement
3 percent |
Currency Pair
USD/CAD |
Minimum Margin Requirement
2 percent |
IG Margin Requirements
IG is yet another great online brokerage that offers great tools and an environment for forex trading. The following table explains the margin requirements of this broker against the popular currency pairs. .
Currency Pair | Minimum Margin Requirement |
---|---|
Currency Pair
EUR/USD |
Minimum Margin Requirement
2 percent |
Currency Pair
GBP/USD |
Minimum Margin Requirement
5 percent |
Currency Pair
AUD/USD |
Minimum Margin Requirement
3 percent |
Currency Pair
EUR/JPY |
Minimum Margin Requirement
4 percent |
Currency Pair
USD/CHF |
Minimum Margin Requirement
2 percent |
Offshore Brokers Margin Requirements
Most offshore brokers issue low-margin requirements in order to attract more investors and traders. But the fact of the matter is that it can be riskier than the traditional online brokers due to many reasons, especially for novice traders. The most important reason is that most offshore brokers are not regulated by any renowned financial authority. So, if anything goes wrong, you as a trader won’t be able to report the misconduct by your offshore brokerage to arrange compensation. Moreover, even if you opt for a broker with a low initial margin, you’ll still be responsible for the underlying trade’s full market value.
3 Simple Rules: How to Avoid Margin Call?
If you want to avoid margin calls from your brokerage, then you must thoroughly understand the margin requirements issued by your brokerage. This way, you'll be able to take the necessary steps in order to keep yourself from falling victim to the margin call.
The following are the three simple rules that you can follow other than understanding your broker's margin requirements.
-
Rule No. 1: Avoid putting all your eggs in one basket and diversify your portfolio.
-
Rule No. 2: Avoid utilizing your whole margin buying power.
-
Rule No. 3: Avoid margin while trading highly volatile securities.
How to Calculate Margin Level?
In order to perform margin call calculation, you can use any margin calculator available online. The best practice is to use the margin calculator provided by your brokerage. For example, if you're using an XM broker for online trading, then consider using its official margin calculator.
Forex Spread
Example
In order to use the XM margin calculator, you’ll need to provide it with the following information to calculate the required margin.
-
Your account’s base currency = e.g. USD
-
Currency pair = e.g. EUR/USD
-
Leverage = e.g. 100
-
Size of the underlying position (in lots) = e.g. 500,000 (5 lots in total)
-
Current exchange rate = e.g. 1.254 EUR/USD
The calculator performs the calculation in the following manner:
Margin needed = (trade size) / (Current exchange rate of the account currency x leverage)
Margin needed = (500,000) / (1.254 x 100)
Margin needed = 3987.24 US dollars
Forex Margin Risks
Now that you understand what margin is in Forex trading and how it’s calculated, it’s time to discuss the associated risks. It’s critical to understand them thoroughly before you dive into acquiring margin for Forex trading.
Systemic Risk
The primary risk associated with Forex trading on margin is systemic risk. It's caused by something that's fully outside of the market's control, and resultantly, the whole financial system can collapse. It includes:
-
Legislative and regulatory changes
-
Political conflicts and strikes
-
Dramatic financial decisions such as interest rates, growth, inflation, etcetera.
Liquidity Risk
As you’d already know, the Forex market is reasonably liquid, but it certainly doesn't mean that it's not susceptible to low liquidity. Several reasons such as weekends, bank holidays can result in a dip in liquidity.
Leverage Risk
It's the fact that you can make more money if the leverage is high, but you can also lose a high amount of money as well. Even if high leverage is available for you by your broker, then you don't necessarily need to acquire that.
Are There Benefits of Margin Trading?
Along with the associated risks, margin trading also comes with some great benefits. Some of the most significant ones are mentioned below.
-
It provides you with the opportunity to leverage assets to magnify your profits.
-
It allows you to earn profit from the declines in share prices.
-
You can use margin trading for the diversification of your portfolio.
-
It comes with lower interest rates as compared to loan.
-
You can pay back the borrowed money with a flexible schedule (if your borrowed money doesn’t exceed the minimum margin maintenance amount).
Use Case 1 of Acquiring Margin
Let’s assume you predict after comprehensive research that the XYZ company won’t be able to meet its financial goals because of its competitor’s progress. So, you borrow 10 shares of XYZ company by using your margin account and sell them short for 5,000 US dollars at 500 US dollars per share.
After 10 months, the share value of XYZ has decreased as you predicted by 20 percent. It means that the single share now values 400 US dollars. So now you purchase 10 shares of XYZ company by paying 4,000 US dollars and return them to your brokerage. The profit you make is 1,000 US dollars. Of course, you’ll need to pay any applicable tax, margin loan interest, and commission.
Use Case 2 of Acquiring Margin
One of the biggest advantages of margin in terms of Forex trading is that it allows the traders to participate in Forex trading with a minimal amount. Otherwise, the traders will need to deposit up to 100,000 units.
For example, if the EUR/USD currency pair is trading at 1.1128 US dollars with the purchase value of 1.11284 US dollars and the sell value of 1.11276. You decide to buy one standard lot because you predict that the euro will increase its value against the US dollar. But currently, you don’t have enough money in your account to buy a single standard lot which will be 111,248 US dollars (100,000 euros). That’s where margin comes in, as it allows you to participate in such trades with a very small amount of money. Let's say the margin factor against EUR/USD of your brokerage is only 2 percent, so you'll only need 2224.96 US dollars (2,000 euros).
Best Brokers for Margin Trading
If you want to perform Forex trading, then you'll need to choose the Forex broker that suits your financial goals and needs the best. One of the most critical factors that you must consider is the margin loan interest rates. For your convenience, we have chosen three of the best online Forex brokers that not only offer the best Forex trading environment. But they also offer the lowest margin loan interest rates available in the industry.
Webull - Best For US Stocks
Webull is one of the finest online brokerages that are not only fully regulated, but it's also considered to be a low-risk and low-cost online broker. It's comparatively a new online trading platform as it was established in 2017, but it has gained so much popularity because of its amazing tools and features.
-
USD margin rate: 7 percent
-
Margin account minimum deposit: 2,000 US dollars
-
Time to open an account: One day
-
Demo account: Available
FxPro - Best For Forex
FxPro was founded back in 2006, and it's one of the best global Forex brokers. It's fully regulated by the most renowned financial bodies. It offers free deposit and withdrawal options and low margin rates. So, it can be your best choice for Forex trading on margin.
-
Number of account base currencies offered: 9
-
Demo account: Available
-
Time to open an account: one day
-
Minimum deposit: 100 US dollars
Interactive Brokers- Best For International Markets
Interactive Brokers is one of those online trading platforms that offer everything that you need to perform trading regardless of your preferences. It’s fully regulated and considered to be one of the lowest-cost online brokerages.
-
Minimum deposit: 0 US dollar for most account types
-
Demo account: Available
-
Time to create an account: 1 to 3 days
-
USD margin rate: 1.6 percent
-
GBP margin rate: 1.5 percent
-
EUR margin rate: 1.5 percent
Summary
Margin trading comes with both advantages and risks. But you can minimize the risks with a comprehensive risk management strategy in order to take advantage of margin trading. Not only will it help you to participate in the trader that you can’t otherwise, but it can also help you to maximize your profits in the shortest possible time. We hope that this guide will help you to understand what margin trading is and how to deal with the margin call most effectively and efficiently. Keep this information in mind while performing your next trade on margin.
FAQs
What does used margin mean?
In margin trading, every position has its own required margin, and all of them are added together by your brokerage, which is known as used margin.
What does equity mean?
In simple words, equity is your account’s total value in real-time. It includes all your open positions, but if there is none, then your total balance will be the equity.
Can you trade Forex with no margin?
Not only Forex, but you can also perform other types of trading without margin if you want to. But it’ll take more time to earn profit as compared to the potential profit that you can earn by utilizing margin.
Is a margin call harmful?
Yes, a margin call can be very harmful to your trading account, especially if you don't resolve it timely. The broker will have the full right to start selling your securities without any prior notification.
Team that worked on the article
Peter Emmanuel Chijioke is a professional crypto, blockchain, NFT, Metaverse and Web3 writer, and a contributor to the Traders Union website. With a background as a top programmer and a computer science graduate, Peter has been writing articles related to crypto, blockchain, and related technologies since 2018.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.