✔️ Information reviewed and updated in March 2024 by Pedro Martínez González

Without a doubt, the popularity of Trading with Forex, CFD's and other assets is increasing as a form of investment. And the fact is that the arrival of platforms and the internet that are becoming faster every day, as devices that are increasingly more accessible and improved, has allowed this business to be really much more accessible.

In order to trade properly, get better profits and develop a good investment strategy in general, there are a few concepts to consider. 🖐️ Here We will explain some basic but really important concepts: what is Margin, Free Margin, Margin Level, Margin call and Stop out, so you can develop the best trading strategies in the world of Trading.

➜ Margin

Brokers are not distinguished by being very clear at first, this because each one can call the same concept differently. Margin, for example, is also known as required margin, used or used margin, initial margin, among other variations.

Margin is an amount of money that the broker keeps as a fund in case of losses while you have open positions with leverage. This amount is set aside and frozen, while your operations are open, it is not a commission, it is only a kind of security reserve that is returned once the operations are closed.

Each broker manages a different percentage of margin. For example, you might open a $ 1,000 trade with 20: 1 leverage. The Broker will request 5% of the operation (50 dollars) as margin or guarantee while he will operate the remaining 950 dollars, retaining the margin while the operation is open.

Margin, Free Margin, Stop Out: Explained

There are two main types of margin:

  • ❌Initial or deposit margin: This margin is the minimum initial amount you need to open a trade or position. If you do not have money in your account, you will not be able to initiate a leverage or operation, since this type of margin is required to start trading.
  • ❌ Maintenance margin: The operations are in constant fluctuation so this margin must keep up with it in case of losses. If your operations are negative and the initial margin runs out, you will receive a call from your broker, known as Margin Call, to deposit more money in your maintenance margin.

➜ Free margin

This margin is also known as Free Margin by its name in English. Basically it is a fund or free margin which you can use to open new positions and cover the losses (like a traditional margin) of your open trades.

🖐️ Its name derives from the freedom or availability you have to use it. Its calculation is very simple, you just have to subtract from your capital (total money available in real time) your required margin (previous concept) in order to determine your free margin. In case of losses or gains, these must be added or subtracted.

For example, if you have $ 2,000 of total capital and $ 100 as a required margin, your free margin would be $ 1,900 ($ 2,000 - $ 100). Now, if you have losses of 60 dollars, then your free margin will be 1,840 dollars ($ 2,000 - $ 100 - $ 60), if they are gains they are added.

➜ Margin level

🖐️ The margin level is expressed as a percentage (%) and represents how much free margin you have to operate, either to cover losses from your open operations or to launch new ones. This is calculated using the following formula:

  • ❌Capital (money deposit + profit or - loss) / margin x 100

For example, if we have a capital of $ 2,000 - $ 50 of losses and a margin of $ 60, the operation would look like this: $ 1,950 / $ 60 = 32.5 x 100 = 3,250%. That would be your level of margin available to perform new trades or support existing ones.

A great advantage of brokers is that it gives you the possibility to configure your margin level. The common thing is that when this falls to 100% (your capital and your margin are equal) you receive the famous Margin Call to deposit more funds because if you did not, you would no longer have enough space to maneuver, that is, there would no longer be funds to back up your operations and open new ones.

What is margin, free margin, stop out

➜ Margin Call

As we have already told you, the Margin Call or margin call is a very common resource in leverage operations. And is that this notification is usually received when your margin falls dramatically.

That is, the Margin Call is a notification, message or email that you will receive from the broker when there is no longer enough money in your account to support your operations or open new ones. The normal thing is that this call happens when your margin falls to 100%, as we already told you, although some brokers send notifications before reaching this point.

When you receive this call you have two options, either invest more money in your fund or close at a loss. If you ignore this call, you can continue to lose money or the broker would close your positions reaching the Stop Out.

➜ Close level or Stop Out

🖐️ The Stop Out or closing level is like a kind of emergency brake designed to avoid losses for both you and the broker. This level is normally reached at critical points, when your margin fell below 100%, the most common is 50%.

When you get to this point, the broker begins to close your trades starting with those with the most losses. This allows you to free up money and your margin to start to recover. For example, by releasing a margin of $ 50, this could go from 50 to 60%.

Normally this point is reached when the warnings have not been enough, for example, you ignored the Margin Calls. By not depositing more funds or not closing your trades, the margin began to fall and fall, making both existing trades and opening new ones unsustainable.

Experts recommend not reaching the Stop Out, since this could severely affect your finances causing you to lose a lot of money. In addition, it would affect your image and reputation with the broker which uses this mechanism to ensure that you never owe them money, while also protecting you.

About the Author: Pedro Martinez Gonzalez

I'll tell you a little about myself! I am a financial analyst and economist with a master's degree in finance.
About my studies: I studied at the University of Salamanca for a Degree in Economics and then did a Master's in Finance in Madrid.
Do you want more information? You can read more about me here in my biography.

A comment on «What is Margin, Free Margin, Stop Out and more? Explained»

  1. Recommended-brokers.com Reply

    Very good explanation, it has clarified my doubts and I have understood it perfectly! Thank you!!

Leave your comment

Your email address will not be published. Required fields are marked with *