Suppose you put up $200 of your own cash to control something to the value of $1000, (let's call it a 'Plonk', as it may be anything, a commodity, shares, currency...whatever) - ie you've got a leverage of 5:1. (Or 1:5, depending on what your viewpoint is <g>) where you are trading $1000 worth of plonks, but only have to stick $200 in your account.
You decide the plonk is going to increase in value, you go long on it - your $200 buys $1000 worth of plonks.
There is a set of underlying assumptions being made:
1) By you - that the plonk will increase in value - you may be wrong on that, you are planning to gamble up to $200 on your judgement.
2) The broker who you trade with is assuming that if you lose more than your $200 and they ask you for the difference, that you'll be able to pay it.
3) The broker reckons that in all but the most unusual circumstances they'll be able to contact you, should your plonks decrease in value, to obtain authorisation for more cash over and above the $200 you gave them already. This is the margin call. If they don't get the result they want, ie some readily accessible source of cash, they will close your long position, you will no longer own plonks, and your $200 will have disappeared.
Unfortunately, sometimes the market moves the way you don't want it to, faster than expected so sometimes your broker can't close your position as quickly as you'd like - you might find your plonks were sold at a $300 loss, and your broker now wants you to send the $100 you weren't planning to lose.
A major assumption when buying anything (ie a long position) is that the thing you buy will not become worthless in a flash - go long on Microsoft with a leveraged account, buy $100,000 worth of shares with a $20,000 account, and - in theory - when the Martians invade and MSFT drops to $0.00 you owe the broker $80,000....
(edit) - obviously on a short position the opposite applies... if something looks poor value but suddenly goes up in price then a short position can lose, very quickly, more than you intended to risk
Leverage is, in a way, an acceptance of the fact that most financial instruments trade within a range of prices that is only a few percent of the nominal price of the instrument - oil might be at $100, but nobody expects it to bounce between $0 and $200 over the short term. On the rare occasions that your chosen instrument DOES bounce by an unduly large amount you make out like a bandit or stump up more cash to stay in the position. Fail to provide the required cash for a margin call - and this is short notice stuff, not 'I'm in granny's will, and she's minted and feeling poorly' - and your position will be closed with very little regard for timing it to minimse the impact.
With leverage you are playing with more cash than you put up - normally it goes okay, you just multiply your wins or losses by the ratio of leverage, but sometimes you can make a huge lump or lose a lot, so you have to be able to stand both.
