What is a margin call?

So, what is a margin call?

A margin call in trading happens when a trader’s broker requires them to deposit additional funds into their margin account. This will only be requested when the account’s equity falls below the broker’s required maintenance level.

This typically occurs when the value of the securities in the account declines due to market downturns or volatility, and they require immediate action. Once a trader receives a margin call, they must add funds or sell assets to restore the account’s value, or the broker may liquidate the assets to cover the shortfall. With most Australian CFD and forex brokers, there is no grace period – accounts are marked to market continuously, so a shortfall can trigger a same-day margin call or automatic partial close-out.

• The margin call is usually met by depositing additional cash, as many accounts won’t accept transferred securities as collateral, or by closing part of the position to reduce the margin required.
• Investing on margin carries clear risks, and losses can significantly exceed what you'd expect without leverage. You should check whether your broker has negative balance protection like Trade Naton does, but it also remains important to use protective stop orders and keep leverage manageable.

As soon as your account’s equity falls below the maintenance margin requirement, a margin call can happen. There are a few reasons for this to happen, and they are as follows:

• Sharp market movements: Sudden price changes can significantly impact your account equity, especially when using leverage.
• Not enough available margin: If your available funds cannot support current losses, you may receive a margin call.
• Higher margin requirements: The broker may increase margin requirements in response to market conditions or regulatory changes.
• Account withdrawals: Withdrawing funds can reduce your equity and increase the likelihood of a margin call on open positions.

It’s important to remember maintenance margin, which is the minimum amount of equity you must maintain in your margin account. When it comes to forex trading, margin is described as the deposit that a broker keeps as collateral to open and maintain a leveraged trade. This allows you to control a much larger position than your account balance.

For more insights into forex trading for beginners, check out our guide.

To give you a better understanding of a margin call, here is an example of how a margin call could occur:

1.     You have A$5,000 in your trading account and want to trade a share using 5:1 leverage through a CFD trading provider.

2.     Your deposit margin will be A$5,000, and with a leverage of 5:1, your total position size will be A$25,000.

3.     You then buy 2,500 shares of a company at A$10 per share.

4.     The share prices drop from A$10 to A$8.50, which results in a loss of A$3,750

((A$10 - A$8.50 = A$1.50 loss per share) (A$1.50 x 2,500 shares = A$3,750)).

5.     Your remaining equity will then be A$1,250.

6.     Australian regulators require CFD and forex providers to close out a client's position once their funds fall to at least 50% of the margin needed to maintain it. Your initial margin was A$5,000, so your maintenance margin would be A$2,500.

7.     Since your account equity has fallen to A$1,250, it is below the required A$2,500. Under Australian rules, this would trigger an automatic close-out of some or all of your position.

Much like forex trading, margin in CFD trading simply describes the minimum deposit required to open or maintain a leveraged position, just like in the example above. Check out our CFD trading strategies if you would like some more insights into this particular form of trading.

There are a few choices you have when faced with a margin call to prevent your broker from liquidating assets. These include:

• Deposit cash: Add funds to your account. This is typically the fastest and simplest way to satisfy a margin call, as it immediately increases your account equity without impacting your existing positions.
• Deposit margin-eligible securities: Some brokers allow approved securities to be transferred in to cover a shortfall. Note that this isn't typically an option with Australian CFD accounts, where cash is usually required.
• Deposit a combination of cash and margin-eligible securities: If allowed by the broker, you could meet the margin requirement using both cash and qualifying securities. This option provides greater flexibility in how you cover the margin call.
• Sell securities: Liquidate some of your existing holdings to reduce your margin requirement by lowering the overall size of your positions. Keep in mind that selling investments may result in realised losses if the securities have declined in value since purchase.

It’s paramount you act upon a margin call immediately. Failure to satisfy the margin call  quickly may result in your broker closing your positions, which could lead to dramatic losses.

To help minimise the risk of receiving a margin call, you can utilise the following strategies:

• Keep extra funds in your account: You can create a cash cushion by maintaining extra funds in your account beyond the minimum margin requirement. This will provide a buffer against market fluctuations and reduce the likelihood of triggering a margin call. Most traders try to keep their account equity at least 30% above the maintenance margin requirement.
• Maintain a diversified portfolio: Reduce risk by investing across a range of asset classes and sectors. Diversification can help minimise the effect of negative price movements in any single investment or market segment, reducing the likelihood of a substantial decline in your account equity.
• Monitor your account regularly: Keep a close eye on your open positions, account balance, and margin levels. Consider setting up notifications so you're alerted when your margin level approaches key thresholds.
• Use stop-loss orders to manage risk: Stop-loss orders can automatically close positions if the market moves against you, helping to limit potential losses. Although execution at the exact stop-loss price cannot be guaranteed, particularly in volatile market conditions, these orders can help prevent smaller losses from escalating into larger ones that could result in a margin call.

Free margin is the portion of your account equity that is not tied up in current open positions and is available to open new trades. It is calculated using the formula:

Free Margin = Equity – Used Margin

For instance, if your account balance is A$10,000 and you have A$2,000 used margin with A$500 unrealised profit, your equity will then be A$10,500 and your free margin will be A$8,500.

Monitoring free margin is highly important as it will help you avoid margin calls.

Why is this so important in forex trading? If your forex trades are profitable, your free margin will increase. If they move against you, your free margin will decrease. You will always want to maintain a sufficient free margin to be able to open and manage additional trades and prevent stop-outs.

Margin level is the ratio between your equity and used margin, shown as a percentage:

Margin Level = (Equity / Used Margin) x 100

A higher margin level means a stronger buffer, while a smaller margin level signals increased risk.

As losses grow, your equity decreases, reducing both your free margin and margin level. If your margin level nears your broker's required threshold, your ability to open or maintain trades may be restricted, and existing positions could be closed automatically.

This makes margin level an important metric. It indicates how much capacity your account has to withstand adverse market movements.

If you’re thinking of starting margin trading with leverage, then you have come to the right place. At Trade Nation, we offer a wide range of different markets to get involved in, even offering the opportunity to open larger positions using a smaller amount of capital with margins.

Ready to get started? Sign up with Trade Nation and become the master of your own investments. You could also check the platform and see if it’s the right place for you by creating a free demo account, where you will be able to practice trading without risking real money. Begin your trading journey with us today.

What happens if you can’t meet a margin call?

If you can’t meet a margin call, the broker will usually take action to protect itself from losses.

In most cases, the following will occur:

• Sell your investments automatically: The broker can liquidate some or all of the securities in your margin account without your permission, and they will choose what to sell and when to sell it.
• You may lock in losses: Assets may be sold during a market decline, turning unrealised losses into actual losses. You also lose the chance to benefit if prices recover later.
• Your account may face restrictions: The broker may restrict future margin trading, reduce your maximum leverage, or even close the account.

You won't be left owing money - ASIC's product intervention order requires Australian CFD providers to guarantee that retail clients cannot lose more than the funds held in their trading account, so you shouldn't end up owing a shortfall beyond your account balance.

How does leverage affect margin call risk?

The reason leverage increases margin call risk is because it allows an investor to control a larger position with a relatively small amount of their own capital. While this can amplify gains, it also magnifies losses.

If the value of a leveraged position falls, the investor's equity declines more quickly relative to the size of the position. Once the account equity drops below the broker's required maintenance margin, a margin call is triggered, requiring the investor to deposit additional funds. Therefore, the higher the leverage, the smaller the adverse price movement needed to cause a margin call.

Trading involves risk, and losses can exceed deposits. No strategy guarantees profits. Before implementing any trading strategy, consider your objectives, experience level and risk tolerance, and seek independent financial advice where appropriate.

Trade Nation Australia Pty Ltd (ASIC AFSL 422661). This information is general advice only and does not take into account your objectives, financial situation or needs. You should consider the relevant Product Disclosure Statement and whether the products are appropriate for you, including whether you qualify as a wholesale or professional investor under the Corporations Act 2001.

Spread betting is not available to Australian residents; the products referred to in this article are contracts for difference (CFDs).