How To Avoid A Margin Call

margin calls

Once every two years or so, an event occurs which forces investors to close positions as quickly as possible. One such event led to a massive increase in selling pressure on stock markets around the world last Monday…

The week started with heavy losses, and in addition to the war in Ukraine, interest rate risk and other known problems, there was another factor. As of Tuesday, large U.S. brokers are demanding significantly more collateral from their customers for their open positions.

High Volatility Means Brokers Demand More Money For Open Positions

Last weekend, stockbrokers announced they would use a new formula to calculate collateral requirements, also known as “margin,” from May 10 through May 24. The new formula is be for stocks, stock options and also futures. The calculation will be based on the volatility of the corresponding trading instrument.

Since volatility has increased massively across the board for all trading instruments in recent weeks, the margin requirement will also increase accordingly between 10% and 40% from May 10 at the latest.

With a capital of €50,000 available for trading and a security deposit at €40,000 , this would mean that in the worst case, at the latest on May 24, too little money is available on the trading account to be able to continue to hold the respective stocks in the account.

Even Rumors Are Currently Dangerous

If we try to put ourselves in the broker’s perspective, this step is understandable against the background of rising inflation, rising interest rates and the Ukraine war.

In this already uncertain time, rumors are enough to kick the markets into a bottomless pit in a very short time. To prevent brokers from sitting on their losses, they are already reacting and hedging by increasing margins.

On Monday The Position-Closing Began

Right at the start of the trading week, this broker news ensured that very many markets went into decline. Customers closed their positions as a precaution. There has been a downward price trend of the broad U.S. index S&P 500 since.

If an investor does not close his position by himself and the account has only 5% of free capital left due to losses, he will receive a “margin call”. By means of this call, the person is asked to do one of two things. One, close some of his open positions so that more money is free in the account again. Two, he has to transfer additional money to the trading account. This will significantly reduce the margin again in relation to the account balance.

If neither of these conditions is met, the broker’s trading computer will automatically react. It will randomly liquidate positions to bring down the required margin.

My recommendation to you is as follows. In the next few days, check whether the required margin is not too high in relation to your account balance. If it is, please close some positions.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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