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Guaranteed Stop & Margin Call


Guest FHM

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Hi all, 

 

Newbie here, I understand the concept of leverage and margin pretty well but not sure how the latter works when there is a guaranteed stops in place.

 

As an example, say I deposited e1,000 into my account and I want to go long on a single name stock using spread betting. I am prepared to risk losing the e1,000 but no more. Share price is e200.00. I set a guaranteed stop at 180.00 (i.e 10% below) and therefore buy 50 units. Say the margin requirement is also 10% so I will also have initial margin requirement of 1,000 (plus the guaranteed premium but lets assume thats 0 for now to keep it easy). 

 

Does that fact that I have a GS in place that ensures my losses are equal to or less than the money in my account mean that I will not be subjected to margin calls? Intuitively I feel like it should but from reading some other posts it seems like that I still would. 

 

If the share price dropped 5% I will obviously have an unrealised loss of e500 but will i also have a margin call given that my 'equity' position is now down to 500e and the new margin requirement is 1,450 (50 * 190 + 500) ? In fact in this scenario even a 1% drop triggers a situation where my equity is less than the new margin... If this is the case, is there a more efficient way of limiting my 'risk' and capital injection to 1,000 while maximising potential upside? 

 

Thanks in advance

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So I don’t have a pen and paper in front of me and I’m on mobile, but I think that yes you are correct.

 

A new rule which focuses on the leverage rather than the maximum financial loss has come in a year or so ago. That means that your guaranteed stop won’t reduce the margin (and thus increase the leverage), but you still have your maximum financial loss safeguarded.

 

So if the margin is 10% and so is your guaranteed stop distance then you’re going to be using all your funds as margin, so a 500 Euro unrealised loss would as you said put you on margin call.

 

On mobile and don’t have excel to figure out the exact number but you wouldn’t need double the amount of funds would ya to cover yourself? You’d be on margin call after that 5% drop, but if you had an extra 500 deposited you’d be able to cover for more... it’s not a linear progression down is it? More diminishing. Maybe I’m wrong.

 

Second question if you have an account where you’re forced guaranteed stops on all positions, should the margin call even ever be applied, because there’s no way to lose more on your account that you have locked up, so the above rules should just be void.

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