11 most difficult questions about margin calls and stop outs

Margin call, stop out, financial markets are complex concepts. Therefore, in this article we answered 11 of the most difficult questions related to this topic.

So let’s go!

What is margin call in the stock and other financial markets?

This is a call from your broker at a time when the amount on your trading account is approaching a critical point, the minimum that will no longer allow you to participate in further transactions in the market.

This is when the broker forcibly closes the transaction due to a drawdown of money in the account. Russian-speaking traders wittily call Margin Call “Walrus Nicky.”

What is the purpose of the broker?

The broker’s goal  is to notify you about the status of your account, so that you can deposit an additional amount on time and continue trading or sell some assets. When a trader does not have the opportunity to make money, the transaction is closed by a stop out. At the same time, your broker will promptly close the part of the positions for which there is enough money in the account.

What are the consequences of getting in a call?

Bringing the situation to a stop out means a significant drain on the deposit. If unprofitable orders are not forced to close, the amount of losses will exceed the amount of the initial deposit , and it will be the broker who will have to pay the difference at his own expense.

For what reasons can it appear?

  • due to adverse changes in the market;
  • reduce the value of assets;
  • increasing the minimum amount of margin that the exchange expects;
  • changes in legislation;
  • increase in volatility.

What is the broker’s role in this process?

A professional manager, when a margin call arrives, uses every opportunity to give you time to make a decision.

If suddenly the margin call call has not reached you, then the broker has the right to sell your shares in order to maintain balance. Worst of all, he has the right to not consult with you and independently decide which papers he will sell to cover the margin call.

broker, Alexander Gerchik, trading, courses for traders, margin call

That is why it is your responsibility to carefully examine the agreement with the broker, to deal with the conditions of the account, the interest calculation rules and your obligations to repay the loan.

There are also generally established rules according to which brokers do not allow buyers to buy too small stocks or securities that are traded off-exchange. Specify in advance all the restrictions that will apply to your account.

How to protect yourself?

To do this, you need to know in advance the terms of the public offer contract, where the sum of the call margin and the stop-out are stated .  When you open a trading account with a broker, pay attention to whether there is a margin call or not at all in the contract.

What does margin call mean ?

When you open an order through a broker, he will take a certain amount as a deposit (freeze). The frozen amount guarantees the safety of the deposit when you start to suffer a series of losses. And you can enter new deals only within the remaining amount.

depozit, Alexander Gerchik, trading, courses for traders, margin call

The sum is calculated by the trading terminal and displayed in the window along with the rest of your account data. Most often, the proportion is as follows: the amount of the margin call is about 80 percent of the capital, and the stop out is about 20.

The following formula is used:

Account Level = current deposit amount / pledge of open orders X 100%.

In order not to bring the situation to a margin call and stop out, just consider the maximum allowable for you drawdown of the account.

When exactly can a margin call appear?

At that moment, when you have about 30% of the money left on the account.

How is the closure on it?

Your broker will unfreeze the amount blocked for this case, it will become available for subsequent trading and provide you with new deals.

What to do to never get into this situation?

First of all, close losing positions and only then profitable ones. Most newbies have neither a plan nor a strategy, and they hope that the movement of the market against their positions will be temporary and the trend is about to unfold. And this does not happen. As a result, they fall on a margin call and suffer enormous losses .

How to minimize the risk?

Do not open many transactions at the same time. Your security deposit should remain within 15% of all available funds in open positions. Do not let the trade take its course, keep the plan.

Learn to keep the amount of margin calls and stop outs in your head and watch your trading account, not relying on the broker, even if it is decent.