What is a margin call?
A margin call occurs when the trader’s account balance falls below the required margin level. This triggers a request from the broker for additional funds to cover the potential losses. If the trader fails to deposit more funds, the broker may liquidate the trader’s positions to mitigate the risk of further losses.
Margin calls are a risk management tool used by brokers to protect themselves and their clients from excessive losses. Traders should closely monitor their account balance and margin levels to avoid margin calls and potential liquidation of their positions.
Example of a margin call
Let’s say a trader has $10,000 in their account and opens a position with a leverage of 100:1, they can control a $1,000,000 position.
If the trade moves against them and their account falls to $9,900, the broker may issue a margin call to bring the account back above the required margin level. The trader would need to deposit additional funds to cover the loss and meet the margin requirement.