Question

Suppose your margin account have $400 in cash. Price of the stock is $10 per share. Earlier bought a stock with 50% margin allowed by your broker, and use full margin. The 50% margin: 80 shares can be purchase and $800 is value of your account after the purchase. Now, suppose the broker issues margin call if margin % fall to 25%. The 25% margin: 160 shares can be purchase, $300 is value of your account after the purchase, and stock price will be $6.67 per share.

If you don’t respond to the margin call, what will be the value of securities the broker will sell from your account?

Answer 1

Sol:

80 shares purchased at $10= $800

After fall of price to $6.67 account value = 80 x $6.67 = $533.6

$300 is value of your account after the purchase

Investor have to maintain $533.6 to avoid margin call. Otherwise broker will sell stocks.

Alternatively,

Formula : Borrowed or leveraged = value of the purchase x (100% - Initial margin requirement)

Hence, Amount borrowed or leveraged = $800 x (100% - 50%)

= $800 x 50%

= $400

Maintenance Margin = 25%

Formula: Account Value = (Borrowed) / (1 - Maintenance Margin %)

Account Value = $400 / (1 - 0.25) = $533.6