What happens in a future trading when losses are more than the margin

[mutualguru]

I am curious what happens when the losses are more than the margin we invested. For example when we buy a future stock we have to pay a margin of 40000 rupees approx (according to stock), lets say after some time instead of gaining profit the above future stock is losing money and lost 60000 rupees total. 60k is more than 40k so we owe our broker 20000 extra.

Do we have to pay 20000 extra rupees to our broker or the broker will automatically stops future stock trading at 40000

PS. Currently studying future trading in stocks using paper trading

 

[rrrajguru]

I am curious what happens when the losses are more than the margin we invested. For example when we buy a future stock we have to pay a margin of 40000 rupees approx (according to stock), lets say after some time instead of gaining profit the above future stock is losing money and lost 60000 rupees total. 60k is more than 40k so we owe our broker 20000 extra.

Do we have to pay 20000 extra rupees to our broker or the broker will automatically stops future stock trading at 40000

PS. Currently studying future trading in stocks using paper trading

You know, technically margin is the borrowed money to purchase securities. Definition says, in the futures market, margin is the initial deposit of "good faith" made into an account in order to enter into a futures contract.

Usually when we trade in future, the futures exchange asks a minimum amount of money that we must deposit into our account or it should already present in our account. Without this exchange will not allow us to trade. This original deposit of money is called the “initial margin”. Usually this initial margin money is 5% to 10% of the total future contract. We will get back our initial margin + whatever gain / loss, once we will square up our position.

Now you have raised a question that, what will happen if our account will drop below the margin due to series of losses?

The answer is, there will be a “margin call”. Broker will call you and will ask you to make some money deposited into your account to give backup to initial margin and it should be deposited immediately.

Without this??? Broker has the right to square up your position.

Summery is one should always use Stop loss to safeguard from disaster.

Hope it clears the doubt, happy profitable trading.

 

[suri112000]

If you are trading with exactly Rs.40,000 initial margin money, the movement scrip moves against your position and the margin is depreciated by 15-20%, the broker has the right to square off your position at market by the virtue of their risk management system. So, they won't wait until your full margin money is depreciated. They play safe!!!!!

 

[GrandMariner]

The important thing to remember is that you are responsible for ALL losses in your account......if, for whatever reason, the broker fails to square your trade when margin is zero, you will continue to be liable for the accumulating losses. This must be kept in mind in case of a black swan incident. Hence options are safer than futures.

 

[James Martin]

For a relatively small amount of money (the margin requirement), a futures contract worth several times as much can be bought or sold. The smaller the margin requirement in relation to the underlying value of the futures contract, the greater the leverage. Because of this leverage, small changes in price can result in large gains and losses in a short period of time.

 

[eku]

I am curious what happens when the losses are more than the margin we invested. For example when we buy a future stock we have to pay a margin of 40000 rupees approx (according to stock), lets say after some time instead of gaining profit the above future stock is losing money and lost 60000 rupees total. 60k is more than 40k so we owe our broker 20000 extra.

Do we have to pay 20000 extra rupees to our broker or the broker will automatically stops future stock trading at 40000

PS. Currently studying future trading in stocks using paper trading

This will never happen.If u have only 40k with ur broker,the max u will lose is only 40k..

 

[kainiteh]

to them it is exceptional.... i believe it would very rare case.... broker's are smarter than us i mean it in management skill , they are handling more of 10k customer.... do you believe they won't have backup plan to avoid spend their money....