What do typical brokers do with regard to adding overnight positions when you have less than 50% equity in your account?
Lets say I bought AMZN a week ago. Lets say I bought $80,000 of it, half of it on margin. My equity is $40,000 and my credit is $40,000. Lets say I intended to daytrade it but instead get stuck in it and it has dropped in value to $70,000. My equity has dropped to $30,000 and my credit is still $40,000. 25% of the total value of $70,000 is $17,500. If my equity drops to or below $17,500 I get a rule 2520 maintenance margin call. However with my equity of $30,000, I have 43% equity in the account--less than 50%. Now I want to add a position trade of MSFT. My equity is still $30,000 so I can buy up to $60,000 worth of MSFT, so I buy $60,000 of MSFT. At the end of the day the broker runs the rule 2520 and Reg. T margin requirements on the account. Assuming MSFT has dropped to $55,000 in value at the end of the day and that AMZN has now also dropped to $65,000, now my equity in AMZN is $25,000 with credit of $40,000. My equity in MSFT is now $25,000 with credit of $30,000. My total equity in the account is $50,000 and my total credit in the account is $70,000. I have to maintain equity of at least 25% of the value of AMZN + MSFT. The value of AMZN is $65,000 and the value of MSFT is $55,000 for a total value of $120,000. 25% of $120,000 is $30,000 which is the required total equity. Since I have equity of $50,000 I am okay with the maintenance requirements of rule 2520. Checking Reg. T on the closing positions of AMZN and MSFT, I had to have at least 50% initial equity to buy the MSFT position. At the time of the purchase of MSFT I had just barely enough equity to make the trade without getting a Reg. T margin call. I'm okay with Reg. T. The last thing to check is my buying power for daytrading the next day. My excess maintenance equity is $50,000 (my total equity) - $30,000 (equity at which I get a maintenance call under rule 2520) which equals $20,000. I am allowed to daytrade with up to 4 x $20,000 = $80,000 the next day without getting a margin call regardless of what AMZN and MSFT do that day. As long as that $80,000 remains in daytrades and again I end the day just holding AMZN and MSFT, there will be no Reg. T requirement at the end of the day. They will still check rule 2520 maintenance requirements based on the closing values of AMZN and MSFT and they will also check to see what my day trading buying power will be for the next day but thats it. However, this guy is using so much leverage that if anything goes wrong, he's going to be getting a rule 2520 maintenance call pretty quick. |
