Margin Calls and How to Avoid Them #securethebag101
(This is not investment advice. All info can be found with a simple TAYsearch.)
Soooooo, an investor buys $100,000 of IBM Inc. using $50,000 of his own funds and borrowing the remaining $50,000 from the broker. The investor's broker has a maintenance margin of 25%. At the time of purchase, the investor's equity as a percentage is 50%. Investor's equity is calculated as: Investor's Equity As Percentage = (Market Value of Securities - Borrowed Funds) / Market Value of Securities. So, in our example: ($100,000 - $50,000) / ($100,000) = 50%. This is above the 25% maintenance margin. So far, so good. But suppose, two weeks later, the value of the purchased securities falls to $60,000. This results in the investor's equity tumbling to $10,000 (the market value of $60,000 minus the borrowed funds of $50,000), or 16.67% ($60,000 - $50,000) / ($60,000) This is now below the maintenance margin of 25%. The broker makes a margin call, requiring the investor to deposit at least $5,000 to meet the maintenance margin. Why $5,000? Well, the amount required to meet the maintenance margin is calculated as: Amount to Meet Minimum Maintenance Margin = (Market Value of Securities x Maintenance Margin) - Investor's Equity So, the investor needs at least $15,000 of equity (the market value of securities of $60,000 times the 25% maintenance margin) in his account to be eligible for margin. But he only has $10,000 in investor's equity, resulting in a $5,000 deficiency ($60,000 x 25%) - $10,000.
This is not investment advice. All info can be found with a simple TAYsearch.The best way to avoid margin calls is to use protective stop orders to limit losses from any equity positions, as well as keep adequate cash and securities in the account.
Read this post until you get it. Then send me a TAYemail with a paragraph summizing what you learned. #imdeadass :)
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