You liquidate all your positions only when your margin is greater than 50%, and do nothing...

You liquidate all your positions only when your margin is greater than 50%, and do nothing while your margin is less than 50%.

When you received a margin call at 30%, then you liquidating everything. Then start again with whatever money you have left in 2-1 ratio.

My question is which formula to used?

Expert Solution

The formula of margin calculation:

Margin% = {(V – L)/V}*100

where, V is total stock value

L is loan from broker

For example is you purchase 100 unit of a stock at $40 and borrowed $2000 from broker:

The value of stock = 100 * $40 = $4000

Margin = {(4000-2000)/4000}*100 = 50%

So if margin is less than 50%, you liquidate. Suppose price of stock falls to $30 then margin will be:

Margin = {(3000-2000)/3000}*100 = 33.33%

So, margin is below 50% thereofore, investor will liquidate and get $3000 and start with 2:1 ratio i.e. $2000 again.

jeff jeffy answered 2 years ago

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