Margin Call – What is it and how does it work?
Margin Call, which is a call to replenish the capital in your brokerage account. This system activates when the level of your capital in the account falls below a ceiling set by the broker. Then the client receives margin calls above the indicated amount, most often by means of information displayed on the trading platform. When Margin Call is active, we are also not allowed to open new positions.
If the market goes up and our balance also rises above the indicated level, the Margin Call expires. The level of this indicator may vary depending on the broker we choose. The amount of Margin Call is expressed by brokers in percentages. To calculate it, simply multiply the level of the required margin by the amount of our Margin Call.
Example:
Margin Call at our broker is 150%. We open a position that requires a margin of PLN 200, and our account balance is PLN 1000. If the market goes in the opposite direction to the expected direction, resulting in a loss on this transaction of PLN 700, the operating balance of our account (equity) will be PLN 300, or 150% of the required margin. At that point, the Margin Call mechanism will just be activated.
It is worth mentioning that all open transactions combined are taken into account.
The name Margin Call comes from the days when trading was mainly done via telephone. At that time, if the deposit in a client’s account was too low, the broker would call the trader and inform him over the phone that the deposit needed to be increased.
If it turns out that our loss will grow, then the Stop-Out mechanism will be activated (go).
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