A margin call is a broker's demand for a trader to deposit additional funds when account losses erode the collateral—called margin—that secures open positions. It occurs when a trader's available capital falls below the broker's minimum requirement.
When you trade with leverage, you deposit margin as collateral to control a larger position than your account balance would otherwise allow. This amplifies both potential profits and losses. As losing trades accumulate, your equity (account balance plus or minus unrealized P&L) shrinks. Your broker monitors the margin level—the ratio of your equity to the margin your open positions require. When this ratio falls to a critical threshold, the broker issues a margin call. If you don't deposit funds to restore the required margin level, the broker will automatically close your positions to limit losses.
Key Components
- Equity: your current account balance, including unrealized profits and losses
- Used margin: the funds locked as collateral for open positions
- Free margin: available capital to open new positions or absorb losses (equity minus used margin)
- Margin level: expressed as a percentage; calculated as equity divided by used margin
Understanding margin calls is essential because they force involuntary position closure at potentially unfavorable prices. This risk is amplified during volatile markets when large price swings can trigger rapid equity declines. To avoid margin calls, traders typically use stop-loss orders to exit positions before losses become severe, maintain adequate free margin, and avoid excessive leverage relative to their account size.
