How Does Margin Call Work?

Derivative instruments, like Contracts for Difference (CFDs), continue to gain popularity due to their ease of trading, ability to hedge positions and potential to trade with leverage. However, since trading with leverage magnifies market exposure, it multiplies your profit and loss potential. This leaves you open to receiving margin calls, especially if you don’t use leverage wisely and fail to implement adequate risk management. According to FINRA, margin debt in the US rose for the fifth consecutive month in September 2025, increasing to a record $1.13 trillion.

Receiving a margin call is one of the most stressful moments for a trader. It means your trading account is running out of money to cover your open positions. If you don’t act quickly to deposit funds in your account, your broker will be forced to close your trades automatically, locking in your losses.

Understanding how this process works is the first step to survival in the financial markets.

The Basics: Margin and Leverage

To understand a margin call, you must first understand leverage and margin. These are the tools that make CFD trading powerful, albeit risky.

Leverage is a loan from your broker. It allows you to control a large trade with a small amount of investment. For example, with 10:1 leverage, you can control $10,000 worth of a stock with just $1,000 of your own money. Margin, on the other hand, is the “good faith” deposit you must put down to open a leveraged trade. In the example above, the $1,000 you used is your “used margin.” Brokers require trades to maintain a minimum balance in their trading account to cover their open leveraged positions. 

Think of it like buying a house. You pay a down payment (margin), and the bank lends you the rest (leverage). If the house value drops significantly, the bank gets worried about its loan. In trading, the broker gives you a margin call.

How a Margin Call Works

A margin call happens when the money in your trading account falls below the minimum amount required to keep your trades open. This usually happens because a trade is moving against you. Let’s understand this through a step-by-step process.

The Setup

You have $5,000 in your account. You open a large CFD trade that requires $1,000 in margin. You now have $4,000 in “free margin” (spare cash) in your account.

The Loss

The market crashes and your trade starts losing money rapidly. The loss eats into your free margin first. If your loss reaches $4,000, your free margin is zero. You now only have your original $1,000 margin left.

The Warning (Margin Call)

If the loss continues, it starts eating into that $1,000 used margin. When your account equity drops below a certain percentage (which can differ from broker to broker), your broker triggers a margin call. When this happens, you may get an email or notification warning you that your account is in danger. You must either deposit more cash immediately or close some trades to stop the bleeding.

The Stop Out (Liquidation)

If you do nothing and the market keeps dropping, you hit the “Stop Out” level (often 50% of margin). Your broker will then automatically close your losing trades to protect themselves. Note that they do not need your permission to do this. The result is that your trade is closed at a loss, and you are left with a tiny fraction of your original money.

How to Prevent a Margin Call

You can avoid the above scenario by using strict risk management techniques. Professional traders focus more on not losing money than on making it. Here’s a look at the most popular ways to manage risks in CFD trading.

Use Stop-Loss Orders

A stop-loss is an automatic order to close a trade if it hits a certain price. It acts as a safety net by limiting your loss before it becomes a disaster when the market moves unfavourably.

Watch Your Leverage

Just because a broker offers you 50:1 leverage does not mean you should use it. High leverage magnifies your losses, while trading with lower leverage (like 2:1 or 5:1) gives your trades more breathing room if the market dips temporarily. So, determine how much money you can afford to lose on a trade and choose your leverage accordingly.

Position Sizing

Never put all your money into one trade. A common rule is the 1% rule, which means not risking more than 1% of your total account balance on a single trade. So, if you have $10,000, you structure your trade so that if it hits your stop-loss, you only lose $100.

Keep Extra Cash

Always keep a buffer of cash in your account. Do not use 100% of your funds for margin. If you use all your cash to open trades, the slightest drop in price will trigger a margin call instantly.

A margin call is a protective mechanism for brokers, but a painful lesson for traders. It occurs when your losses exceed your free cash, threatening the margin deposit you put down. By respecting leverage, using stop-loss orders, and managing position sizes, you can ensure that a margin call is something you only read about—not something you experience.

To Sum Up

• Trading with leverage opens you to the risk of margin calls.
• A margin call is a notification from your broker when the balance in your trading account falls below the level required to keep your positions open.
• You must deposit funds in your account upon receiving a margin call, or your positions might automatically be closed.
• Adequate risk management is crucial to avoiding margin calls.
• Using stop loss orders, choosing the leverage level wisely, position sizing and only using a part of your trading capital on a single trade are effective risk management techniques.

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