When this happens, the broker usually warns the client that he needs to fund his account, otherwise the value of the assets may not be enough to close the position. Such a notification comes through the trading terminal or by e-mail, this is called a margin call.
Brokers themselves determine the level of losses at which they send a margin call. Some notify the client as soon as the margin decreases by at least a ruble. Others send a notification when the investor’s own assets lose, for example, 50 or even 80% of the value. And some do not use a margin call at all, and in such cases, investors risk even more – they can suddenly lose all their assets.
If the investor does not put money into the account and the losses reach a certain level (usually from 50 to 90% of the margin), the broker, as a rule, uses a stop out – that is, it will forcibly close positions in order to return their money. In this case, the client will receive losses.
Alexei bought shares of Superbank with a leverage of 1:2.5 for 375,000 rubles in the hope of their growth. His margin was 150,000 rubles. However, after a couple of days, the bank’s shares began to rapidly fall in price. The broker sent a margin call, but Alex missed the notification. When the share price fell by 20%, the broker himself sold all the Superbank shares that were on Alexey’s account. By this point, he had lost 75,000 rubles – half his margin.
In trading programs, brokers always indicate the minimum margin level of the client, at which they themselves will close his positions. But you need to keep in mind: brokers have the right to use a stop out, but they are not required to use it. It may happen that losses cover the margin, and you will remain in debt to the broker. Therefore, you should not rely entirely on margin calls and stop outs – it is important to independently monitor the state of your portfolio.
How much does a margin loan cost?
Usually there is no charge for a loan when you use borrowed funds within one trading day. But if you hold the broker’s money or securities longer, he will write off interest on the use of his assets. As a rule, rates are from 15 to 20% per annum, or about 0.04%-0.05% per day. And in any case, you will have to pay a commission for transactions.
Alexey’s broker takes a commission of 0.05% for each purchase and sale of securities and 0.04% per day of the amount of money or asset value he lends. For a margin trade with Superbank shares, Alexey had to pay: 375,000 × 0.05% (for the purchase of securities) + 300,000 × 0.05% (for the sale) + 275,000 × 0.04% x 3 days (for a loan) = 670 rubles. And at the same time, the deal itself brought him 75,000 rubles of losses.
Brokers charge a daily margin loan fee even on non-working days of the exchange. If you open positions for a long time, the credit rate can reduce all profits to zero. That is why transactions with leverage are usually concluded for a short time.
Are leveraged deals available to novice investors?
Trading on margin is associated with high risks. Therefore, before you start trading with leverage, inexperienced investors need to be tested. As soon as you want to make the first margin trade, the broker will offer you to pass the test. It’s free.
Questions will assess your knowledge. You need to give the correct definition of margin trading, answer whether the broker has the right to charge you for a margin loan, and estimate the amount of possible losses. You also need to know in which case the broker can forcibly close the client’s position.
You can retake the test as many times as you like. But even if you do not manage to answer all the questions correctly, the broker may allow you to make unsecured transactions in the amount of up to 100,000 rubles, warning you of the risks.
Testing for access to margin trading in the forex market is more difficult. It has more questions than the Leveraged Stock Market Test. And until you answer them correctly, you will not be allowed to make transactions, since the risks of forex are especially high.
You can learn how to prepare for testing and where to start learning from the text “Where to learn to invest”.
I passed the test. How to get a margin loan?
Usually, you do not need to draw up any additional paperwork, since the possibility of margin lending is already spelled out in the brokerage agreement.
To use the broker’s funds for transactions, it is enough to activate the margin trading mode in the trading terminal. But it is important to be extremely careful: transactions with leverage are very simple. You can accidentally buy securities for more than you have, or even sell shares that you do not have, and only then realize that all transactions took place on credit.
It is better to turn off the margin trading mode to eliminate the possibility of error and reduce the likelihood of losses, and turn it on only when you really need it.
If there are so many risks with margin trading, why are they needed? Can they be useful at all?
In order to successfully play on the rise or fall in the value of securities through margin trading, you need to