In this video, you’ll learn about the different types of margins1 that you will come across when trading with Plus500.
What are Margins?
Margins enable you to use leverage when trading an instrument. This allows you to put down a percentage of the opening value of the trade while still gaining full exposure to the instrument’s size.
This increases a trader’s exposure & risk to the fluctuations of the market. For example, if an instrument moves in a direction that is not in the trader’s favour, they are responsible for the full value of the leveraged trade’s movement.
What is the Initial Margin?
The Initial Margin is the amount required in order to open a leveraged position. The margin ratio gives traders information regarding the power of the leveraged position.
For example, if you are trading an instrument that has an Initial Margin of 5%, or a leverage of 1:20, you only need to put aside that margin amount in order to gain full exposure. The benefit of trading with leverage is that you can realise 100% of the profits of the trade even though only 5% of the total value was used. This can also work against traders, because their exposure to risk is magnified.
A trader will notice that when opening a position, the funds that are used to open the position are deducted from their ‘Available’ funds while their ‘Equity’ remains the same. A simple way to calculate the total available balance is: Available = Equity - Initial Margin.
What is a Maintenance Margin?
The Maintenance Margin is the minimum amount of equity which must remain available in order to keep positions open.
The amount that needs to remain available in your equity to satisfy the Maintenance Margin is half the value of the Initial Margin. For example, if a position requires the trader to put aside 5% of the trade value to open a trade, then they will need to keep only 2.5% of the trade’s value as their Maintenance Margin in their equity to keep it open.
Traders should be aware that if the market moves against their positions and the equity drops near the Maintenance Margin requirement, they will be at a greater risk of a Margin Call.
Traders can see the Maintenance Margin requirements for each product in the instrument details in the Trading Platform.
A trader has no open positions and $2,000 available in their account. Assuming they can open a leveraged position on an Oil CFD where the Initial Margin is $1,000, and another position for Netflix CFD with the same amount for the Initial Margin, they will have two open positions, with $0 under ‘Available’ but still almost $2,000 under ‘Equity’.
As positions begin to move either up or down, the amount of equity will change. But as long as the amount of equity does not dip below the combined Maintenance Margins of $1,000 ($500 for Oil and another $500 for Netflix), the positions will remain open.
What is a Margin Call?
A Margin Call refers to the automatic closure of a trade due to insufficient equity.
This happens as a result of a price moving in a direction that is not favourable to the trader, reducing their equity below the Maintenance Margin, meaning that they no longer have enough equity to sustain the position.
Traders can use a stop loss feature as an extra precaution against margin calls but should always remain aware of market movements while positions are open. In order to avoid margin calls, traders can deposit more funds2 to meet the maintenance margin requirements or reduce their exposure by either closing or adjusting their open positions.
One of these free alerts is a Margin Alert that can be sent via SMS, Email, or Push notification. It serves to notify you that your available equity is low and that your position has a high probability of being closed automatically, unless you take action.
It is important to know that due to carrier interruptions, rapid price movements, and other factors, Margin Alert notifications are not guaranteed and should not be relied upon to make trading decisions.
Ultimately, it is the trader’s responsibility to monitor their trades to ensure that they have sufficient funds to support their position’s Maintenance Margin.
1Leveraged trading activity involves substantial risks for losing all of the invested funds in a short time period. 2Depositing additional funds may prevent the transaction from being closed, but also can increase potential loss.