Everyone should be aware that CFDs being a leveraged product come with the ability to lose money as well as make money. Again everyone know we all have losing trades. Margin calls are very important to understand so as to avoid you CFD provider closing out a position because you were unable to cover the margin at time in the market you did not want to close that position.
A margin call occurs when a trader no longer has any free equity in the account to cover the margin required to hold that position. The video example below will explain everything in more detail but in brief you need to have equity in your account over and above that of the required margin to ensure you can cover any unrealised losses the position may incur. Its when your free equity fall below zero that you will enter a margin call.
I always recommend a few suggestions to avoid a margin call:
- Always keep enough cash in the account to cover a worst case scenario as you are liable for the full value of the position you take.
- Secondly actively check your position to make sure the market has not gone against you.
- Set alerts in your trading system so you know when you are reaching a margin call
- As soon as you do enter a margin call be pro active about fixing it before your providers actions something you did not wish to be actioned.
Most providers will attempt to contact you Via, txt msg, email or notification on your platform. When things get bad they will call you (hopefully as not all of them do and is why its good to be on top of it yourself). Most companies take credit card payments if you want the cash to hit instantaneously to get yourself out of margin call. Some providers are more lenient than other regarding your ability to ride a margin call but you usually have to have a pretty good relationship with them for this to happen. Even then it will only be for a short period of time. Not all providers contact you which is why you as the trader need to be on top of this!
Note: all CFD providers have the right to shut you out of any or all of the positions you hold even if its only a $1 margin call. Make sure your proactive!