Q. Let’s say I have a R10,000 account and the market opens far below my stop loss and I receive a margin call.
Do I owe the money to the broker or does the broker carry the risk? What happens if I cannot pay the money back?
A. It’s always good to know the worse case scenarios with trading.
First, let’s explain a margin call
A margin call is a situation where a trader does not have enough funds in their account to keep a trading position open.
Your broker will either phone you or you’ll receive an automated message with a margin call warning.
If you are ever in this situation, you will be instructed to do two things.
1. Deposit more funds into your portfolio to keep your trading positions opened.
2. Close your current open position/s that are running at a loss, before your trading platform closes them out for you.
Tip: When setting up a trading account with a broker find out what their minimum margin requirements are.
Let’s look at an example with a Margin Call
Here are the specifics:
Equity portfolio: R10,000
Initial margin deposit: R5,500
You buy a CFD trade which says you need to have at least 30% of the margin (initial deposit) in your account, to keep the trade opened.
This means, you need R1,650 (30%) in your account to keep your trade opened.
The next day comes and the market crashes below your stop loss.
Your new account balance is now R1,500…
Unfortunately, you’ll hit a margin call as your portfolio only has 27% of the initial margin of your trade.
= Equity ÷ initial margin deposit
= R1,500 / R5,500
27% is less than 30% of what you need to maintain an open trade.
The broker now has the right to close the trade and to send you a notification about what happened.
You will receive a margin call to instruct you to deposit more money into your account or to close your trading positions.
What happens if I cannot pay the margin call?
Essentially, you will be owing the broker as they will not be carrying the risk.
If you cannot pay it or refuse to clear the negative balance, you will not be allowed to trade with the broker and/or trading platform again until you pay what you owe.
Depending on the size of the debt, if you refuse to pay it then some brokers may have the legal right to pursue the outstanding debt through legal means.
This means they could file a lawsuit.
They could even take the matter to court, where a judgement may be issued where the trader will be required to repay the debt.
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