Margin call

Learn what a margin call stands for in financial terms.

To understand what a margin call is, you have to know what it means to trade on margin.

Sometimes referred to as ‘leveraged trading’ or just ‘leverage’, trading on margin is when you trade using borrowed money. Doing this allows investors to buy much more of a particular asset than they would otherwise be able to.

The money they use is usually borrowed from a broker. In order to borrow, investors have to put down some of their own cash or other assets as a form of collateral. This collateral is known as ‘margin’.

Getting a margin call

The reason a broker asks for margin is so that they don’t lose the money that they’ve lent you to trade with.

So if the asset you have invested in using borrowed money loses the value of the margin you put down, the broker will ask you to give them more cash or assets as margin. If you don’t do this, the broker will liquidate the position in an effort to make sure they don’t end up losing money.

An example of a margin call

Imagine you have a broker that lets you trade on margin of 25 per cent. That means you have to put down a minimum of 25 per cent of the value of the trade that you are going to make.

Using this broker, you buy some shares worth £1,000. You put down £500 as margin and the broker lends you £500.

Unfortunately for you, those shares fall in value to £600. That means the broker’s original £500 is still there but you now only have £100 in the trade.

In percentage terms, that means you also now only have ⅙  - 16.66 per cent - as margin. This is below the margin level required to keep the trade open.

To keep the trade open, you would have to deposit assets or cash that would bring your margin back up to the 25 per cent level that the broker requires. If you fail to do that then broker will liquidate your position and recoup the money that they lent to you.

More terms

OEIC

Unique to the UK, these funds pool together money to invest from multiple investors.
Read more

Ponzi Scheme

A form of fraud designed to lure new investors, and pays the earlier backers by using the new investors' money.
Read more

Net asset value

Mutual funds and investment trusts are priced on their net asset value (NAV).
Read more

DMO

The United Kingdom Debt Management Office. It’s an executive agency responsible for managing the government’s debt and cash needs, primarily through issuing gilts and Treasury bills.
Read more

Gross Margin

The difference between a company's revenue and the cost to produce its goods/services, divided by revenue.
Read more

Exchange-Traded Fund (ETF)

A collection of investments, pooled into a single fund that can be bought and sold on a stock exchange.
Read more

Accrued interest

The interest earned on a gilt since the last dividend date. When buying a gilt, the buyer pays the accrued interest at the time of a transaction to the seller in addition to the clean price of the gilt
Read more

American Depository Receipts (ADRs)

Tradeable assets that let Americans invest in overseas stocks using US laws and dollars.
Read more

Year to Date (YTD)

A period of time that starts with the first day of the current calendar year and ends with today.
Read more

You’re just minutes away from commission-free investing

When you invest, your capital is at risk