You shorted a stock for $50. Inital margin=0.40 Maintenance Margin Requirement = 0.30. At what price will you get the first margin call?
50 * 1.4 / 1.3
Both of you explain, please…no formulas, just logic.
When you short a stock the margin call is above the current market price due to the fact the your equity position has declined in value. I usually just follow the formulas, thats how I learn stuff
A margin call on a short position (you are selling shares you borrowed from the broker) is received when the price of the underlying is going up instead of where you hoped would go, and that is down. This is because you will be asked to either return the asset (that you sold without having – you borrowed it from the broker) or pay the difference between your margin account and the market price of the underlying. Say you short the underlying at 50, if price goes up to 60, you would have to deliver the underlying of 60 or pay the difference: sold @50, bought back @60 to return it. NOT THAT GREAT! The current price of the underlying is X (that we will determine soon). For the argument sake we shall consider that you short one share. At the time the stock was shorted, you had to deposit a margin of 40% of the asset: 0.4*50=20 . Proceeds form the sale of the underlying are deposited into your margin account. The initial value of your margin account becomes 50+20=70 Daily, the account is marked to market to account for gains or loses. At all times, your margin account has to have at least 30% of the current market value of your portfolio, or you will receive a margin call. Margin = (Initial margin account– Current value of your position)/ (Current value of your position) 0.3=(70-X)/X, solve for X, X=70/1.3=53.8462 Hope this helps. Myself, I cannot memorize formulas, if I don’t understand the concept.
Good stuff map1! That’s what I wanted to see to clear it in my head.
Do you want the explanation for a long position too?
Got that from you some time ago.
http://thismatter.com/Money/Stocks/selling-short.htm is also a good artical on this.
Dreary Wrote: ------------------------------------------------------- > Got that from you some time ago. Dreary, this is how i think Long position if maintainence margin is X 30, then lender is saying at any given time, you are allowed to borrow (1-X) 70% of the market value of the stock. But what you borrow to do a trade is initially determined by initial margin. So once you ascertain how much you borrowed initially, you simply say if 1-x = borrowed money; then market value = borrowed money / 1-x to get the share price, you simply divide market value / # of shares. Short position. follow as map said.
I did see that…makes sense.
for short trigger price formala = Initial price * (1+initial margin)/(1+maintaince margin) = 53.846.
for long trigger price formala = Initial price * (1-initial margin)/(1-maintainence margin) correct?