Networm:
Here's my understanding of margin.
$12,000 cash @50% margin buys $24,000 of stock. (12/.50 Reg T) Therefore,
$24,000 CMV (current market value of stock)
-$12,000 DB (Debit Balance) the money your borrowing from broker.
_____________
=$12,000 EQ (Equity) your money.
-$12,000 Reg T (50% of CMV or $24,000).
___________
= 0 EE (Excess Equity)
INCREASE IN MARKET VALUE:
$30,000 CMV (stock increased in value)
-$12,000 DB (you still owe $12,000 you borrowed).
=$18,000 EQ Equity(yours)
-$16,000 Reg T (50% of CMV)
=$2,000 EE (excess equity) otherwise known as SMA(special memorandom Account) No cash in it just an account memo.
Excess Equity divided by Reg T (50%) = buying power. Therefore,
$2,000 divided by .50 = $4,000 of buying power. This means you can buy $4,000 more of stock.
MAINTAINENCE CALLS:
The Feds set it a 25%, but brokerage houses can set it higher for safety but can not reduce it below 25%. Normally they use 30%.
The following formula can be used to calculate how low the value of securities can go before you get a margin,(maintenance),call.
Using 30%. DB(debit balance) divided by 70%. Therefore,
$12,000(amount you borrowed) divided by .70 = $17,142.86.
Your CMV(current market value,$24,000)can go as low as $17,142 before Equity falls below 30% of minimum maintenance requirement.
$17,142 (100% of CMV)
-$12,000 DB,(amount you borrowed) 70% of CMV
=$5142 EQ(yours), 30% of CMV (maintenance call below this figure)
Normally there is no margin if you close out all trades the same day.
Hope I didn't drive you over the edge.
Dominick |
