Hey Guys, Was hoping someone could assist me woth calculating the maintenance margin… If Lara has a margin account of $50 000 or 40% which equals to a total stock purchase of $125 000, and is required to hold a maintenance margin of 30%. Assumuptions: Shares purchased 3 571 Purchase price $35 To what price can the share fall before Lara receives a margin call, and secondly what is the total amount of margin? I understand how you would wokr out the share price= $30, however what is the total amount of margin to be keept in the equity balance, IE is it 30% (125,000) =37,500 there for equity posistion may not fall below the 37,500 mark? or is that wrong? Thanks
i think there’s some really easy formula to do this so for the L1’ers out there with it, speak up (I can’t remember it), but in theory, look at it this way- you put up $50k in your acct which is 40% of the 125k of stock you bought. so now you bought your 3571 shrs at 35 bucks, $124,985 worth of stock. so what happen if the stock goes down to $30 bucks? the mkt value of that stock is now 3571 x 30 = 107,130. you had $125k before, so in market value you just lost 125k - 107,130 = 17,870. now, who’s money is that you’re losing, yours or your brokers? sorry to say it, but it’s yours. so you had put up $50k, you just lost 17,870, your equity level in your acct is now equal to 32,130. remember we said your mkt value is now 107,130. maintenance req is 30% of this, so .3 x 107,130 = 32,139. guess what? you are right at the point of a margin call here b/c you reqs are 32,139 and your equity level is 32,130. $9 margin call. Again, there is some easy formula to get reqs but I think what maybe you aren’t seeing is when the stock loses value, it comes out of your pocket, your equity… so you have to figure that in. there’s an easy formula for this somewhere- dig it up, i haven’t looked at this stuff in a while but that’s the bigger idea anyways.
the formula for a long position is initial price (or value) x (1-initial margin %)/(1-maintenance margin %) or in your case 35 x (1-0.4)/(1-0.3) = $30 For a short position, replace the minus signs with plus signs. To remember which is which, remember that you get a margin call on a long position when prices drop, and on a short when they rise.
Bannisja/Busprof Very much appreciated, Thank for taking the time to reply.