A margin call is best described by an example.
If you have a long share trade on margin and the stock experiences a steep fall, you might end up getting a margin call. The spread betting company won’t usually force you to sell immediately, they will phone and ask for more money and then only if you can’t pay will they close the position.
Example: You have bet on the DOW at £10/point. The deposit factor for the DOW is 200 and so you have made a deposit of 200 x £10 = £2000. The market moves against you and you incur losses of £700 (i.e. you have £1300 left) – this is likely to trigger a margin call from your spread betting company.
Definition: A margin call is a situation where your spread betting account triggers a call from your spread betting company asking for more money to cover your bet. Unfortunately, margin calls are what bring down some spread traders.
Each spread betting position you open requires that you have a certain balance in your trading account to cover your leveraged position.
If you are over-leveraged in any market and not utilising a guaranteed stop, you run the risk of facing a margin call should the trade move against your predicted direction and the amount in your trading account doesn’t cover at least the minimum necessary to cover the margin deposit which is there to protect the spread betting provider against you honouring the position.
Let’s say your account has £250 in it.
You open up a sread trade at a stock price of 500 at £10 a point, your stop loss is at 20 points so you’re risking £200. You’re required to have 5% deposit so 5% of £5,000 amounts to £250
The price moves to 490, you’re down £100 to £150 available. You still have to have 5% deposit so now you’d need 5% of £4,900 = £245
You only have £150 available, you’d get a margin call for £95 to bring your account up to £245.
Margin calls depend on the provider’s policy. The most lenient company might not contact you until you lose 80% of the original so your stock goes from 100p to 21p whereas others will close the trade at 80p.
If you have an insufficient amount in your spread betting account to cover a loss then you will be asked for a margin call. You must be in a position to get more money to them quickly to cover your bet, or to be prepared to be closed out and sustain losses. In volatile market conditions, the price could move suddenly and sharply against you. If you are at work all day, away for a few days or on holiday, you could return to find that you have incurred substantial losses which must be made up immediately. If you are planning on going away whilst you have bets open, you should make arrangements to stay in close contact with your spread betting company (well we have iPhone trading these days).
A margin call is usually made when your losses reach about 33% of your deposit for that bet. Note that not all spread betting providers will alert you about this as they may assume that you are watching the markets, but the main providers will. In any case, it is normally expected that you will be pay at fairly short notice (within a day or two max). Best avoided by using smaller quantities. The main danger of spread betting is greed and position sizing.