When the equity value of an investor’s account falls below the maintenance margin requirement, this results in what is called a margin call. Margin trading is a method for traders to allow themselves greater exposure to the financial markets. Traders only need to pay a percentage of the full value of the asset, which will be considered their deposit, and by borrowing capital from the broker, they are able to trade larger amounts.
A deposit margin is needed to firstly open a position, and the maintenance margin is in place to keep the position open. Therefore, when a trader has encountered a number of losses and their account revaluation (equity) level falls below the minimum balance to keep positions open, this prompts a margin call, for which they must either invest more of their own funds or sell their assets in order to decrease the maintenance margin required.
Margin trading, otherwise known as trading with leverage, can result in both profits and losses for the investor, depending on if the market moves in a favourable or unfavourable direction to their position. In the latter case, professional traders run the risk of losing even more than their deposit value, as they are not covered by the negative balance protection that retail traders are entitled to. Traders should therefore firstly identify the risks associated with such trading methods before registering to trade with our spread betting and CFD trading products.
Given that financial markets can be volatile and move rapidly, it is imperative that traders are notified when their equity is falling towards the maintenance margin requirement. When trading with CMC Markets, our customers are notified by email when this figure reaches 80% of the original value. This will require the trader to take action on their account before it reaches the minimum level, or they may be forced to sell assets to compensate, regardless of the market price at the time.
The maintenance margin percentage can differ depending on each broker; at CMC Markets, it stands at 50%. When a trader’s equity drops below this percentage, if the margin call is not met, the broker will automatically start to close their positions in order to reduce any further potential losses. This gives them the right to sell any positions that the trader is holding, with an additional commission charge for some transactions. This event is called a stop out or close out level.
We propose four different close out methods in order to give our clients a fair chance to redeem their positions. Where our maintenance margin requirement is 50% and our reset level is 70%, the following options apply:
As discussed above, a trader’s margin call can be calculated depending on their margin requirement and account equity (revaluation) level. However, there is no specific margin call formula as it differs for each individual circumstance. As the maintenance margin requirement stands at 50% for our customers, when the value of their account decreases to only half of the margin level, this will start the liquidation process.
As an example, a customer is using his spread betting or CFD trading account to trade on the price of gold with CMC Markets. With an account revaluation of £1000 and a total margin of £200, there are no problems yet as the account value is worth five times the amount of margin. However, the market suddenly turns in an unfavourable direction and his account revaluation is reduced to £180. As the value of his account is now below the margin level of £200, this prompts a margin call. When its value reaches 80% of his total margin (£160), we send out a notification email. The trader now has the opportunity to either invest more funds or sell his assets in order to reach our reset level. If the market continues to regress and his account revaluation falls below 50% of the margin level (£100), this means that his account is due to be liquidated and the platform will close any trades where the market is open. All securities held will then be sold for cash as part of our close out process.
As discussed, our online trading platform, Next Generation, requires clients to trade using margin on all positions that they open. In exchange, we offer a variety of close out methods and risk management tools such as execution and order types. You can set up trading alerts on our interactive platform, and we will notify all clients by email when their positions are in danger of being liquidated.
Trading on margin is a risky process; therefore, we offer a demo account where traders can practise first with £10,000 worth of virtual funds before opening a live account. Then, when you feel more confident in your trading abilities, you can deposit live funds and start trading the live markets. It is a good idea to familiarise yourself with our platform beforehand.
Using margin in trading presents many risks, which is why we advise all of our traders to consult our money and risk management guide before placing any deposits. Margined trading is a double-edged sword, due to the risk of losses being just as great as profits. Margin calls are a frequent occurrence for traders who do not properly manage their trading strategies. There are several methods to avoid or prevent a margin call from happening.
Using a stop loss order can prevent your equity falling below margin maintenance requirements. Traders can set a specific price that they do not want to exceed, and if a market moves in the opposite direction to their bet, the stop loss will close the position before money is lost. However, this does not always prevent slippage in the market, where the expected price of a trade and the actual price executed differ slightly due to volatility. In this case, a traditional stop loss order would not suffice, and for complete certainty that your position would close out at the exact price specified, you would need to pay a premium for a guaranteed stop loss order. Consult our guide to the different types of stop-losses here.
When using margin in particularly volatile markets, including shares and forex, traders should take extreme care. These markets can change rapidly without warning and some platforms can collapse entirely, which makes derivative trading very dangerous for first-time and retail investors. Customers should ensure that their knowledge of each market is very thorough before placing a trade, in order to avoid risks and losses.
How is margin calculated in spread betting?
The margin that traders are required to deposit before placing a bet reflects only a small percentage of the full value of the position. Different margin rates may apply according to the markets that you wish to trade in, such as in the share market. Learn how to calculate spread betting margins.
How can you avoid a margin call?
Are there any benefits for trading on margin?
A benefit of trading on margin is being granted better exposure to all financial markets, as you can trade multiple positions using only a small deposit. This will also improve the diversification of your portfolio, as certain markets that you trade may be increasing in value, even if others are not, which minimises the risk of losses. However, trading with leverage is a double-edged sword, so read more about the risks associated in our complete guide to margin trading.
Do margin rates vary for different markets?
The percentage of margin that you can trade with does depend on the market. For example, the forex market has the lowest margin rates on offer at just 3%, whereas the margin percentage for shares is at 20%. Read more information on our markets page.
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