In margin trading, a trader borrows money from a broker to trade assets (stocks, currencies, or commodities). Margin is the amount of money that the trader must deposit to open and maintain positions. The term margin will help us to understand what a margin call and stop-out mean in trading.
What is a margin call? A broker’s request to increase your margin level
A margin call occurs when a trader’s account falls below the required margin level. The required margin level is the amount of money that must be maintained in the account to keep a trading position open.
Margin call happens when the value of the traded assets decreases, or when the trader has used up all of the available margin in their account.
For example, a trader’s account reaches a certain level and there are several active positions. A broker will inform them to deposit additional funds to bring their account back up to the required margin level. If traders don’t comply, the broker will close some (or all) of the trader’s positions to minimize clients’ potential losses.
The broker usually closes out the least profitable positions first and keeps the profitable ones open. Nevertheless, if all positions result in losses, they will all be closed.
What is a stop-out? Automatic closing of negative positions
A stop-out refers to an automatic process initiated by a broker. It happens when a trader’s account falls below a certain threshold, typically the margin level required to maintain open positions.
When a stop-out occurs, the broker will automatically close out some (or all) of the trader’s positions to reduce the risk of further losses.
This safety feature is designed to protect both the trader and the broker from excessive losses.
Margin call and stop-out. What is the difference?
Let’s repeat: A margin call is a request from the broker for additional funds when a trader’s account falls below the required margin level. A stop-out is an automatic closure of positions when the account falls below a certain threshold.
In simpler words, the margin call goes first. If a trader doesn’t reply to this “call”, then occurs the stop-out.