So, let’s start with what a margin call represents in financial spread betting, and in essence it is a call to you for more money. It’s as simple as that! Your spread betting account has reached a point at which a red flag has been raised, and that you are in danger of exceeding the limits set by the spread betting company. More importantly, the company is protecting its own position, as it has no intention of offering you credit to support further losses! When you trade using a simple cash account buying stocks or shares ( in a non margin account), any losses are your problem and it is for you to monitor your trades on an ongoing basis. Your profit or loss is realised when you close your position. Your broker has made his profit from the commission and is happy – he is not exposed to any risk by your trading activities. As long as you have cash in your trading account you can continue to buy and sell shares ( or any other financial instrument) – your buying is purely governed by the cash balance you have available.
With a margin account this is not the case – your spread betting company has lent you money to trade and therefore takes a very close interest in your trading account and any losses which occur, and they are not allowed ( by law) to let you extend your trading beyond certain defined limits. This limit is reached when your maintenance margin is no longer sufficient to cover the ongoing losses on your trades. So when will you receive a margin call – let’s go back to our example from the previous page and see what happens – if you remember, after we had opened our long position in the FTSE 100, the index promptly fell 50 points so our account now looked like this:
- Total cash £ 10,000
- Initial margin -£300
- Variation margin -£ 500 ( -50 x £ 10)
- Available trading capital £ 9,200
Now, let’s assume the market has some dramatic falls over the next few days ( as has been the case in the last few months) and within a week the index has fallen 970 points. Our account will now look like this :
- Total cash £ 10,000
- Initial margin -£300
- Variation margin -£9700 ( -970 x £ 10)
- Available trading capital £ 0
At this point you will receive a margin call from your spread betting company, as your account in effect only has £300 left in cash ( the initial margin ). If the situation were left to continue then very shortly your spread betting account would be negative and the spread betting company would be providing you with credit, something they cannot do by law, and would not do anyway. So, what are the options when you receive a margin call? Let’s consider the options.
You now have several alternatives to consider, but there is one thing you need to understand – you have to decide NOW – you cannot wait and pretend the problem will go away. So, you have four alternative courses of action:
- DO NOTHING – if you ignore the margin call, then the spread betting company will take action without reference to you, and close out some or all of your positions. Your cash balance will be whatever is left.
- REDUCE/CLOSE POSITIONS – if you have multiple contracts in place, you can close some or all, to reduce variation margin and increase your trading capital, moving your account back into “positive territory”.
- ADD CASH – transfer a cash deposit into your account.
- PLACE STOP LOSSES – a margin call will almost certainly mean you are trading without stop losses ( which is madness anyway), but if you add these now, this may reduce the margin call.
All of the above have one thing in common – you must make a decision NOW – even if it is the “do nothing” option, at least you know why you have taken this decision. Adding cash in my view is the worst thing you can do at this stage, as clearly your spread betting is out of control as you have no risk or money management strategy in place to protect your trading capital, which is the first rule of trading. You are simply pouring more money into the financial spread betting company’s coffers which is madness.
So STOP, close your positions, and go and learn how to trade professionally with whatever capital you have left. Finally, don’t think that by adding margin your positions will come good in the end – they won’t. All you will do is lose more money as clearly you have no trading plan or strategy, and no understanding of the risks involved. Remember, it is your responsibility to monitor your trades – not the financial spread betting companies, so don’t bleat if the above happens to you – you only have yourself to blame.