You can find all details about margin trading in this Overview. On this page you will be informed about the risks as well as the process of a margin call and a forced liquidation.
What is a margin call?
A margin call occurs when the value of a margin account falls below the amount required by the broker, i.e. the minimum margin (maintenance margin). The account holder is requested to make an additional margin payment or to liquidate positions so that the margin is covered again. If the account holder fails to do so, the broker will be forced to liquidate open positions. In the event of a serious margin breach, liquidation may also occur immediately.
What are the dangers of a margin call and how do you protect yourself from them?
Margin trading allows you to trade securities with a leverage. With a leverage of, for example, two, a price increase of a share by 10 % means a profit on your invested capital of 20 %. However, if the share price falls, you will also suffer a disproportionately high loss on your invested capital.
Margin accounts are therefore particularly suitable for investors and traders with sufficient experience to know the risks and be able to protect themselves against them.
If you receive a margin call and cannot provide the necessary liquidity in time, forced liquidations will occur. Forced liquidation is always carried out by means of a market order, as the margin requirements must be covered as quickly as possible. The market order may result in an execution that is unfavorable for you.
To protect against a margin call and especially against forced liquidation of open positions, investors and traders should always allow for a sufficiently large buffer. I.e. the margin should not be fully exhausted, or only if one is aware of the possible consequences.
If there is a threat of forced liquidation on your account, you will receive a warning (margin violation) as soon as the excess liquidity is less than 5% of the net liquidation value. As soon as the current excess liquidity is less than zero, forced liquidation will occur. This is described in more detail below with examples.
What happens in the event of liquidation?
In the event of liquidation, positions are automatically closed out, as the minimum margin (maintenance margin) can no longer be covered by the account and the margin call has not resulted in timely coverage.
Depending on the severity of the margin violation, different liquidations may occur.
In principle, the positions that have the highest impact on the margin are always closed first during liquidation. At the same time, these values must also be tradable at the time of liquidation. In this context, the times outside the regular trading hours also apply. For example, trading in Europe is possible from 08:00 to 22:00. A liquidation in a U.S. future can be carried out for 23 hours every trading day. In the event of a forced liquidation, the positions are generally closed with a market order in order to cover the margin requirements as quickly as possible.
What are the types of liquidation?
When the Current excess liquidity is just in the negative range, a forced liquidation takes place after 10 p.m.. This takes place on the US market if there is a US stock in the portfolio. If only European stocks are in the portfolio, the forced liquidation takes place the next day.
When the Current excess liquidity is strongly in the negative range, there is an immediate forced liquidation. Here, as a rule, those contracts are liquidated which burden the margin the most. This ensures that as few positions as possible are liquidated.
When the Current excess liquidity is strongly in the negative range and can no longer be covered by the residual value of the positions, there is an immediate forced liquidation including the obligation to make additional contributions. The debts are held by the broker and charged to the customer. Interest is charged for the loan of the funds, so it is best for the customer to settle the outstanding amount as soon as possible.