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Stop Out

A stop out occurs when an investor’s margin account falls below the required maintenance margin level, leading the broker to automatically close one or more open positions to bring the account back into compliance. This action is taken to prevent further losses for both the investor and the broker. Stop outs usually happen in highly leveraged trading, where adverse market movements can quickly deplete available margin.

Example

An investor trading on margin sees their account value drop due to a sharp market decline. Since the equity in the account falls below the broker’s maintenance margin requirement, the broker triggers a stop out, closing some positions to restore the margin level.

Key points

• Automatic closing of positions when margin falls below required levels.

• Protects both the investor and broker from further losses.

• Common in leveraged trading with significant market fluctuations.

Quick Answers to Curious Questions

To protect both the investor and the broker from accumulating further losses when the margin requirement isn’t met.

A margin call gives the investor an opportunity to deposit more funds, while a stop out automatically closes positions when the margin falls too low.

Traders can monitor their margin levels closely, reduce leverage, or add funds to their account to prevent the margin from falling below the required level.