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A margin calls refers to the situation where a broker requires their customer, who has an open position with leverage, to post more collateral to maintain the position. These can be prohibitively expensive, especially when they occur due to a decline in the market value of the position. Margin calls may hit equity, forex or derivatives traders.
Leveraged trading is sometimes referred to as ‘trading on margin’, because only a margin is actually invested by the trader to open the position, the rest being covered by their broker. Normally the broker will have a maximum amount of leverage they are willing to offer, perhaps 80 or 90% of the position. If the value of the securities bought as collateral falls, then the broker may require additional margin be posted in order to support the original ratio. The minimum level of deposited funds is known as the maintenance level, and whenever the value of collateral falls below this level, a margin call occurs.
For example, imagine a brokerage account for a stock trader which offers up to 10-1 leverage and has a maintenance level of $6000. If a trader buys Stock X on a margin of 10 to 1, putting down $10,000 worth of stock as collateral, the broker lends the remaining $90,000 to buy $100,000 of stock. The trader of course expects the value of Stock X to rise, but instead it collapses.
If price of Stock X falls by half from $100 to $50, the value of the collateral falls to $5000, and the overall position to $50,000. This takes the trader below the maintenance level, and he will face an immediate margin call of $1000 to maintain his account. If necessary, the trader must liquidate other positions to cover the margin call, as otherwise he will be forced to sell at a highly unfavourable price.
Brokers use margin calls to ensure their client’s losing positions do not destroy the financial integrity of the brokerage. Because margin calls force the closure of positions, they are greatly feared by traders, who will use very tight risk management practices on leveraged trades to avoid them.
ADSS offers a range of global markets for traders, with CFD opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC – S.P.C (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates under First Category: Dealing in Securities and Fifth category: Arrangement and advice (Introduction). ADSS is a Limited Liability Company – Sole Proprietorship Company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
