Understanding risk · Leverage & margin
Margin Call: What It Is and How to Avoid One
A margin call is your broker’s demand to add money or reduce positions because the equity in your account has fallen below the required minimum, the maintenance margin. It affects anyone who buys with borrowed money or holds positions that require collateral, such as short options, futures or CFDs.
If you do not act in time, the broker may close your positions itself, often without further notice and at unfavourable prices.
By Daniel Berg ·
What margin is: collateral, not a fee
Margin is the equity you must post as collateral when you take on positions that are larger than your cash or where losses can exceed what you put in. The word is used for two situations that are worth keeping apart.
Buying on credit
You buy shares partly with money lent by the broker, and the securities serve as collateral for the loan. In the US this is a margin account; German banks often call it a securities-backed (Lombard) loan with a lending value per security.
Collateral for obligations
With short options, futures or CFDs you do not borrow money, but you take on an obligation. The broker blocks margin to cover it. More on the seller’s obligation in our guide to exercise and assignment.
Initial and maintenance
Initial margin is what you need to open a position. Maintenance margin is the floor your equity must not fall below while you hold it. It is usually lower than the initial margin.
The US is an example of fixed rules: under Regulation T, retail investors may borrow at most 50% of the purchase price of stocks, and FINRA rules set a minimum maintenance margin of 25% of market value for long stock positions. Many brokers ask for more – so-called house requirements of 30% or higher, and much more on volatile names. European brokers and banks set their own rates per security.
How a margin call happens, step by step
The mechanism is plain arithmetic. Your loan stays the same when prices fall, so every loss comes entirely out of your equity – and equity as a share of the account shrinks faster than the account itself.
Worked example · illustrative, not market data
- Stock purchased
- $20,000
- Equity at the start
- $10,000 (50%)
- Margin call threshold ($10,000 ÷ 0.75)
- about $13,333 account value
- Price decline to the threshold
- about −33%
- Account value falls to
- $13,000
- Equity now ($13,000 − $10,000)
- $3,000 (about 23%)
- Required: 25% of $13,000
- $3,250
- Shortfall (margin call)
- deposit $250
The stock fell 35%, but your equity fell 70%: that is the leverage of the loan at work. Without the loan, your $10,000 would have lost $3,500.
Instead of depositing, you can sell. Then the loan and the account value fall together while your equity stays at $3,000. To get back to 25% you would have to sell about $1,000 of stock (account value $12,000, loan $9,000). Selling takes several times the shortfall.
The rule of thumb for the trigger point: account value at a margin call = loan ÷ (1 − maintenance rate). The bigger the loan and the higher the maintenance rate, the smaller the price drop your account can absorb.
What your broker does when you get a margin call
Many people picture a phone call in which the broker politely asks for more money. That can happen, but do not count on it. What counts is your account agreement.
A demand with a deadline
Traditionally you receive a notice with a deadline to cover the shortfall. The deadline is often short, sometimes just until the next trading day.
Automatic liquidation
Many online brokers calculate margin continuously and close positions automatically as soon as the requirement is breached – sometimes without prior notice, and intraday.
The broker chooses
As a rule, the broker decides which positions to close and when. It is rarely the selection you would have made yourself.
Losses beyond the account
If liquidation proceeds come in below the loan, for example after an overnight gap, a negative balance remains. In stock and options margin accounts you are generally liable for it. Retail CFD clients in the EU are protected from negative balances; margin accounts in general are not.
The forced-selling spiral
When many investors are borrowing at the same time, forced selling can amplify a decline: falling prices trigger margin calls, the resulting sales push prices lower, which triggers new margin calls. That is why market watchers follow total margin debt as a sentiment and risk gauge. A high reading, however, says nothing about when a correction will come.
Margin on options: short puts and uncovered positions
When you buy options you pay the premium in full and need no margin; you cannot lose more than you paid. Margin comes in once you sell options without holding an offsetting position, such as an uncovered put or call. With a cash-secured put, by contrast, you set aside the full purchase amount, so a margin call cannot happen.
Margin on short options is not fixed; it rises when the market moves against you. Exchanges and brokers calculate it on a risk basis – Eurex, for example, uses its own risk model. A widely used US standard formula for uncovered equity options helps to see the principle: premium plus 20% of the stock value, minus the amount the option is out of the money, with a minimum of premium plus 10% of the strike (for a put).
Worked example · illustrative, not market data
- Stock when opened
- $110
- Premium received (1 contract = 100 shares)
- $2 × 100 = $200
- Margin: $200 + 20% × $11,000 − $1,000 out of the money
- $1,400
- Stock falls to
- $90
- Put price now (assumed)
- $12 × 100 = $1,200
- Margin: $1,200 + 20% × $9,000
- $3,000
The required collateral has more than doubled while you are also sitting on a $1,000 paper loss. If implied volatility rises at the same time, the put gets even more expensive and margin climbs further. Anyone who has filled their account with short puts gets a margin call exactly when prices are worst.
Your broker may require considerably more. The calculation shows the principle, not any particular broker’s requirement.
Assignment adds a second effect: if an uncovered put is assigned, you buy 100 shares per contract at the strike. If your cash is not enough, that purchase becomes a loan – and the margin arithmetic above applies. Our guide to implied volatility explains why volatility plays such a big part.
A special case: CFDs in the EU and the 50% close-out rule
Since 2018, retail clients trading CFDs in the EU have been covered by uniform protections introduced by the European securities regulator ESMA and adopted by national regulators such as Germany’s BaFin. Three of them concern margin directly.
- Margin close-out rule: the provider must close one or more open CFD positions once account equity falls to 50% of the minimum margin required for those positions. The rule applies per account.
- Leverage limits: initial margin is prescribed by underlying, for example 30:1 for major currency pairs, 20:1 for major stock indices, gold and non-major currency pairs, 10:1 for other commodities and indices, 5:1 for individual shares and 2:1 for cryptoassets.
- Negative balance protection: retail clients cannot lose more with CFDs than the funds in their CFD account.
These rules apply to retail CFD trading, not to stock and options margin accounts. Clients classed as professional lose part of this protection. Our guide to BaFin, ESMA and investor protection gives an overview of who supervises what.
How to avoid a margin call
- 01
Keep leverage deliberately low
Do not use your full borrowing capacity. Borrowing only a small share moves the trigger point far lower.
- 02
Plan a buffer
Keep free capital above the maintenance margin. Work out in advance at which price your account would hit the threshold.
- 03
Defined risk instead of naked options
A credit spread caps the maximum loss and therefore the margin. The requirement does not keep growing when the market moves against you.
- 04
Limit position size and concentration
Many positions on the same market fall together. Position-sizing rules are in our guide to risk management for options.
- 05
Set alerts
Most platforms show your excess liquidity and can warn you when it drops below a limit. Check that figure ahead of events such as earnings or central bank meetings.
- 06
Act before the broker does
When the threshold gets close, reduce yourself – on your terms and in the order that fits your strategy.
Common misconceptions about margin calls
“I will always get a deadline first.”
Not necessarily. Many brokers liquidate automatically as soon as the requirement is breached. Read your account terms.
“I can’t lose more than my account.”
True for retail CFD clients in the EU thanks to negative balance protection. In margin accounts with stocks and uncovered options, a negative balance can arise and you are liable for it.
“Margin calls only happen to professionals.”
Anyone using a credit line or selling uncovered options can receive one. Small, heavily used accounts are hit most often.
Frequently asked questions
What is a margin call in simple terms?
A margin call is your broker’s demand to add money or reduce positions because the equity in your account has fallen below the required minimum. If you do not cover the shortfall, the broker can close positions itself.
How long do I have to meet a margin call?
That depends on your account agreement. Some brokers set a short deadline, often until the next trading day. Many online brokers, however, liquidate automatically and immediately once the requirement is breached. Do not assume you will get a deadline.
Can I lose more than my account balance?
Yes, in margin accounts with stocks and uncovered options. If liquidation proceeds come in below the loan, for example after a price gap, you are left with a negative balance you are liable for. Retail CFD clients in the EU are covered by negative balance protection.
What is the difference between initial and maintenance margin?
Initial margin is the collateral you must post to open a position. Maintenance margin is the minimum your equity must stay above while you hold it. If equity falls below that level, you get a margin call.
Do I need margin to buy options?
No. Bought options are paid in full with the premium, and you cannot lose more than that. You only need margin when you sell options without holding the shares or the full purchase amount as cover.
What is the ESMA 50% margin close-out rule?
Under ESMA’s rules for retail clients, a CFD provider must close open positions once account equity falls to 50% of the minimum margin required for those positions. The rule applies per account and is meant to stop losses from running further.
How do I calculate when my account will get a margin call?
For a stock margin loan a good approximation is: account value at the margin call = loan divided by (1 minus the maintenance rate). With a $10,000 loan and 25% maintenance margin, the threshold is about $13,333 of account value. For options, it depends on your broker’s risk model.
Sources and context
All amounts in the worked examples are round, fictional teaching values. Your broker’s margin rates may differ; your account terms always prevail. Rules and limits follow the primary sources below. This guide is educational and is not investment advice.