How do margin calls work on CFD trading?
While statements, particularly trading statements can seem confusing, it is important to know when it is that you will go into a margin call situation. Often traders only look into how and when it is they will receive a margin call, only when they actually get the call.
To assess whether you are due to pay margin, you must add up all the margin requirements for all your open positions on your account. If the cash on your account and the overall profit or loss value of your open positions, otherwise known as the surplus is less than the margin requirement on your account, you will be required to fund the shortfall- a margin call.
As an example, a typical CFD trade is going long 1000 BHP Billiton with a cash balance on the account of $2,000.00.
Buying 1000 BHP Billiton units at $39.00 would require an initial deposit of $1,950.00 or 5%. Every open trade whether it be long or short will require a deposit or an initial margin.
If BHP Billiton subsequently fell to $38.50, the running loss on 1000 shares would be $500.00 ($0.50 x 1000 shares).
In this example the cash on account and running loss make the surplus $1,500.00 ($2,000.00 - $500.00)
Margin is a floating amount rather than one fixed payment. With BHP Billiton trading at $38.50 the deposit is now only $1,925.00 (5% floating), however the surplus is lower than the margin required on the open trade.
Less Deposit Required $1,925.00
A shortfall of $425.00
This shortfall would be the margin call amount and the amount required to keep the position open.
If your cash balance was $2,500.00 to begin with, you would not be in a margin call.
It is useful to know that on 1000 shares for every cent the stock fell on a long trade your running loss would increase by $10, on 10,000 shares it would be $100 etc.
This will give you an idea when entering a trade how much you can afford the stock to move against you before receiving a margin call.
By Harley Salt, Senior Sales Trader, IG Markets
Disclaimer: The views expressed in this article are those of Harley Salt, a representative of IG Markets and is not intended as general advice. This does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.
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