What is a margin call on eToro?

Many users choose eToro platform over any other because of its simple clear interface and transparent description of services it provides. Trading or investing has never been so accessible before, with the amount of learning material, tools and strategies out there. However, there are still several technical aspects in trading you should be familiar with and margin call is one of them. Margin call can easily disrupt your trading process and needs to be paid attention to at any point in time. Below you can find a quick guide on what is a margin call and how it works on eToro platform.

(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings.  In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)

What is a margin?

A margin is a set proportion of your account’s total cash equity that is required on the platform for you to be able to trade freely without any limitations. eToro requires sufficient cash equity from each trader to ensure that they can maintain their open positions and not run into losses they cannot afford. eToro imposes a certain requirement for the minimum capital amount on your account and that is an equity balance of equal to or above 20%.

One thing to understand here is that the available money you have deposited on your account is not the same as your total equity. In simple words, equity is what you would get in case you decided to close down all of the positions that are open and cash out all the gains and losses on them: it the total value of real funds that you have available. Thefore the available balance from your deposits is only a part of your cash equity: cash equity is the sum of your account’s available balance (the money you have deposited and use to open new trading positions), total capital allocated to open trades, including manual trades and any CopyTraders or CopyPortfolios allocations and also orders that are still pending, and finally your net profit or loss, which is the sum of all the current losses or gains you are making on your open trades, depending on the opening and closing prices. You should be able to see you total equity by clicking on the “Portfolio” and looking at the cash equity overview at the bottom, like on the image below. You can also choose to display it in several local currencies eToro makes available.

This definition of margin requirement also actually means that the balance on your available account can become negative in case you have you have invested all of your money into trading positions and some commission (such as overnight fees) was deducted on top. That is not a major problem as long as your equity remains positive.

Sometimes unfavorable market movements on your trading positions may result in losing trades with net losses and your cash equity is not sufficient to compensate for them, resulting in a margin call. This could also happen when the cash on your account is negative and the value of open trades is too low to compensate for that; for example, when your available balance is – $40, and theres only $20 of net profit and a total of $20 or less on the value of open positions, resulting in 0 or almost negative equity.

This requirement also means that you can get a margin call even if the value of total equity is above zero on your account. That is because margin call is only concerned with the cash equity balance and if some of your trades have been made using credit from eToro it may still result in negative cash equity and hence a margin call.

How does this work in practice? Well let’s say you have a total investment into assets worth $2000 with only $1000 deposited and the rest taken as leverage from the platform. In case of unfavorable market movements the value of your positions drops by 40% to $1200 and your own equity is now only $200 because of the intial borrowing in this trade. That amount is now lower than the 20% margin, as $200/ $1200 = 16.7% That will result in a margin call.

What happens after a margin call?

Once you are only approaching a margin, eToro will send a notification alert on the platform. After you receive this notification there are two options available: either close down (sell) your open positions (which will lower the margin amount) or add more money into your account (that will increase the monetary amount of margin and hence increase the value of your equity). The second option should be chosen with caution: some investors prefer to keep on adding their money to maintain losing positions in hope that the market will turn around in their favor. That is not always the case unfortunately, as markets are extremely volatile and unpredictable. Always remember to spend time and effort analyzing your trading strategy, assets and open positions as well as setting an appropriate stop-loss to make sure you don’t lose more than you cannot afford.

After your cash equity falls below the platform’s treshold eToro will close down all of the open trading positions as well as suspend any further trading. You can restart trading once the cash equity value is above zero again after the team reviews the balance and absorbs any losses if your account remains eligible.

Bear in mind that when it comes to cryptocurrencies, eToro is not actually required to contact you to perform a margin call and liquidate these assets in your account. Your cryptoasset positions can be sold without notifying you firstly to achieve the margin requirement and it is each trader’s responsibility to monitor their cash equity on these trades; eToro may allow you to add more funds to prevent its liquidation but it not actually an obligation. For more details refer to the terms and conditions of the platform.

How to avoid a margin call on your account?

Well, the answer to to that is quite simple: have enough cash on your account balance at any time and make sure the losses you are incurring are not beyond your personal limit. Don’t forget to reconsider positions that are making a loss before investing more money into them.

In fact in case you are placing an order and there is not sufficient money on your account to cover for the fees, maximum loss on this position and margin it may not be executed at all; eToro tries to protect its traders and itself in many possible ways.

Can you lose more funds that you deposited?

Fortunately, you can never lose more money that you have deposited on your account. In case eToro performs a margin call on your account and all of the open trading positions will be closed down, any possible losses will be absorbed by the platform as part of the Negative Balance Protection policy and your total equity will be reset to zero. In simple words, this policy ensures that you cannot lose more money that you have deposited on your account.

How does this work in practice? Let’s say you have deposited $1000 in your account and used 2x leverage to invest long into stocks, so your total position is worth $2000. In case of an unfavorable downturn of 30%, your position will see a decline of 60% (because of the 2x leverage you used). That represents $1200 in monetary terms and is more than you have actually deposited. In this case the loss will be covered only by the $1 000 you deposited.

Stop-loss and Maintenance Margin

Another safety tool availble for your funds on the eToro platform is the stop-loss level. You can set up your stop-loss up to 50% when opening a position (unless it is a non-leveraged long position) to safeguard against losses after unfavorable price movements, as shown below.

Once the trade is open it is possible for trader to extend the original level of stop-loss, which will use up some of the money on your available balance to maintain the permitted margin level for trading safety. For example, if you invested $100 on a trade with 50% stop-loss and you wish to stretch it to a full 100%, your account will be debited with an additional maintenance margin of $50. This maintenance margin helps to ensure that you do not end up losing more than your original investment into a trade in case of unfavorable price movements by employing your deposited funds as a buffer. You can also hopefully see the difference between the initial and maintenance margin in this setting: initial margin is your own money invested to open a position and maintenance margin is the equity required to keep a position open.

Hopefully this article made the concepts of a margin call, as well as the initial and maintenance margins more clear to you. Remember to trade with caution and use safety tools to ensure you are not losing more money than you can afford, not feeding in additional capital into positions that are unlikely to end up in profit. Markets are extremely volatile and investing with thought and caution is the best thing one can do. Best of luck and enjoy eToro platform!

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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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