When a Trader Gets a Margin Call - Examples

Here are some real examples of when a margin call occurs. These are frequent situations that many traders face. It is important to be able to prevent them, and if the situation is already unfortunate, respond appropriately.

Example 1 - General
Suppose you have decided to buy 10,000 shares of a large company. The price per share is $5. Therefore, you will need $5x10,000=$50,000 to buy the target number of shares. But you only have $25,000 in your account, so what can you do? You can borrow the other half of the amount from your broker (1:2 leverage). And you do so successfully. Alas, the stock quotes subsequently fall by 28%. You incur losses and the amount of margin decreases proportionally, reaching a pre-critical level. The broker sends you a margin call with a demand to take measures that allow you to avoid forcible liquidation of positions by him in the future if the value of the shares decreases.

Example 2 - With the settlement
In this example, let's assume you buy $10,000 worth of shares of the same company. You only had $5,000 in your account, so you borrowed another $5,000 from your broker. Your forecasts didn't come true, the quotes dropped and now you're holding $10,000 worth of stock, but only $7,000. This is where it's important to calculate your equity percentage. This is done using the formula:

• Current Stock Value - Borrowed Amount = Your Equity.
• Your Equity / Present Value of Stock x 100 = Percentage of Equity.

Now let's do the calculations for our example. Using the first formula: $7,000-$5,000=$2,000, that's your current equity. By the second formula: (2000$/7000$=0,28) x100=28. 28 is the percentage of equity in the trade, the rest of the capital belongs to the broker on the basis of the margin provided.

Now let's turn to your broker's margin trading terms. Many brokers require that the equity percentage of the trader should be at least 20-30% of the open position. In this case, the equity percentage is below 30%, so the broker will send you a notification - a margin call. The notification will contain a requirement to deposit such an amount that the number of funds on the deposit will give you at least 30% of your equity in an equity trade. It's not hard to calculate, here's the formula:

• Current stock price x required minimum equity percentage = required minimum equity.
• Minimum Equity Requirement - Current Equity = amount to be added.

In our example, the layout of the first formula: 7000$x0,30=2100$. According to the second formula: 2100$-2000$=100$. So, you will have to deposit $100 on your account, in order to meet the margin requirements of your broker. Now you know what a margin call is, with an example.

Also, if you want to use all available trading tools to increase your profits as soon as possible - follow this link below, or contact us via live chat. Our experts will help you to choose the best strategy for success.

Follow our updates for useful information in our series of articles. You can also visit our previous article for a better understanding of this topic.

Risks and Opportunities of Short Selling at Forex

Everything is clear with possibilities - a trader can earn in a short time on falling in price of an asset (currency, security, raw material - shorts are opened with everything). And it is possible to earn really good money if one can accurately predict the strong fall of the price and competently diversify risks. Experienced traders make 2000-4000 dollars per week on shorts, and this is not the limit.

What's the catch? The first point we've already mentioned - a broker does not give credit for free. You have to look at the percentage of the short rate in the plan you choose. For example, it's 13% per annum. That means that you will have to pay $130 per year or 0.36 cents per day for every $1,000. If the position remains open for several days, this is a significant amount. Another important point of shorting on the exchange and Forex is the increased risk due to mathematical expectations. To simplify, when you buy an asset, its price can grow infinitely, so your profit, in the long run, has no limit. And the price of the asset can fall only to zero, and your loss is limited strictly to the amount invested. That is, if you buy a security or other asset for $1,000, you have the opportunity to earn $5,000 or more, but lose only $1,000.

With shorts, it's the opposite - your profit is always strictly limited, but your loss is not. Considering that you trade with credit funds, the broker will not allow you to lose more than you can handle (that's why the margin is calculated with the risk rate), if the trend is unsuccessful, he will take back some or even all of the funds that were frozen in your account as credit security.

The main risk with a short in the stock market is a squeeze. A situation where the trader becomes a hostage to his own actions. For example, he actively buys currency futures, creating demand, and the price of the asset rises. The bears, who bet on a falling price, are not happy, so they open shorts by selling the asset, with the intention of buying it later, when the price falls. If the bears' efforts are not enough and the trend does not change, they have to close positions at the market price in order not to lose more. But they only push the trend higher.

A short squeeze is when there are fewer sell orders, and the price rises sharply. It occurs when bears actively close orders, trying to avoid losses due to an unfavorable trend. No matter how well a trader calculates the economic situation in the world, he or she will not be able to be protected from the squeeze. This risk cannot be avoided.

In the next article, we will tell you about the types of accounts for shorting currencies.

Also, if you want to use all available trading tools to increase your profits as soon as possible - follow this link below, or contact us via live chat. Our experts will help you to choose the best strategy for success.

Follow our updates for useful information in our series of articles. You can also visit our previous article for a better understanding of this topic.