Trading CFDs carries considerable risk of capital loss. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

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What is margin and what is a margin call?

February 12, 2016

CFDs are leverage products that offer you the possibility of trading with more money than your initial investment. The money that you have to put in personally is called margin.

In trading, you regularly hear the terms margin and margin call. That's why we would like to explain their exact meaning.

What is margin?

When you open a new position, you only put a percentage of the amount needed to do so, this is the margin. The broker will give you a loan for the rest.

Imagine you want to trade a position of 10,000 dollars with a 10:1 leverage, the broker will hold 1,000 dollars as a security measure from your account. These 1,000 dollars is the margin. The broker will loan the other 9,000 dollars you need to trade.

Margin can be profitable when your position is favorable to you. If it is adverse, you losses are magnified as well.

Margin varies between 3%-50% depending on the underlying and the broker. If you work with a broker which requires a 5% margin and you want to trade a 10,000 dollars position, 500 dollars will be used as margin.

If you trade with CFDs, then you won't become the owner of the underlying shares. The CFD broker will buy shares upon your request and you must only finance a very small part. 

Look at the example below. You want to buy 20 Tesla shares at 207.88 dollars. Normally, a similar investment would cost you 4,157.60 dollars.

If you choose a CFD, you must only invest 831.52 dollars (the margin) to have an exposure of 4,157.60 dollars.

Trade wisely! Because of the leverage you can take gigantic positions, which however are not appropriate for the size of your wallet.

Set a stop loss so that you know what amount you risk at the most. But first learn to trade with a free demo.

What is a margin call?

You get a margin call when your account does no longer have enough funds to keep the existing positions open.

Let's start from the above example again. Imagine you deposited 1,000 dollars on your account and opened the above position with it.

If Tesla starts 10% lower tomorrow, then the value of the total investment decreases to 3,741.84 dollars. With CFDs the difference is completely on you.

For the above position you would look at a loss of 415.76 dollars, because of which your account would basically only have 584.24 dollars left.

This margin is insufficient to keep the position open. Remember you need to hold 20% of the position as margin, in this case you still need to have $748,20. You will get a margin call: the broker will ask you to deposit extra funds on your account.

With European regulated brokers such as Plus500 or Fortrade, positions are closed automatically so that your account cannot drop below zero.

With some non EU regulated brokers this does not happen and consequently your account can drop below zero. In which case you own your broker money.

Therefore, you should preferably protect your open positions with a guaranteed stop!

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