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December 12, 2020

Margin Agreement Investopedia

Filed under: Uncategorized — Mark Baker @ 9:17 am

A margina account cannot be used to purchase shares on a margin on an individual pension account, trust or other fiduciary account. In addition, a margin account cannot be used with equity accounts below $2,000. This is higher than the 25% maintenance margin. Suppose two weeks later, the value of the securities purchased falls to $60,000. As a result, the investor`s equity falls to $10,000. (The market value of 60,000 USD minus the borrowed funds of 50,000 USD or 16.67% (60,000 USD – 50,000 USD) / (60,000 USD)) Maintenance margin is the minimum capital that an investor must hold in the margin account after the purchase; It is currently set at 25% of the total value of securities on a margin account, in accordance with the requirements of the Financial Industry Regulatory Authority (FINRA). Instead, you will receive “payments instead of dividends” that may have different tax effects. If your shares are lent, you may also lose your voting rights. If you use the margina account to buy securities, you buy a stock amount by creating a fraction of that amount. The reason why margina accounts (and only margina accounts) can be used for short selling stocks is related to Regulation T – a rule introduced by the Federal Reserve Board. This rule is motivated by the very nature of the short selling transaction and the potential risks associated with short selling.

The investor has the potential to lose more money than the funds deposited into the account. For these reasons, a margin account is only suitable for a demanding investor with a thorough understanding of additional investment risks and trading requirements with Margin. Suppose an investor with $2,500 in a margin account wants to buy Nokia shares for $5 per share. The client could use additional margina funds of up to 2500 $US provided by the broker to purchase Nokia shares valued at $5,000 or 1,000 shares. If the stock rises to $10 per share, the investor can sell the shares for $10,000. If they do, after refunding the $2,500 USD of the invested broker and without the original $2,500, the trader earns $5,000. Merrill, Bank of America. “Invest in margins.” Access on August 15, 2020. A margin call occurs when account investments and cash securities lose value and fall below the minimum maintenance margin.

The investor must deposit additional funds or sell part of the portfolio to finance the Margin Call. If the investor does not finance the account after a margin call, the broker will sell part of the shares to the account to compensate for the deficit. The broker does not need the agreement of the account holder to sell shares if the investor does not meet the margin call. Regulation T (or Reg T) was introduced by the Fed to regulate how brokers lend to investors. It requires short trades to have 150% of the value of the position at the time of the creation of the shorts and be kept in a margin account. These 150% consist of the total value or 100% of the short value plus an additional margin requirement of 50% or half the value of the position. If you are surprised, the margin requirement for a long position is the same. With the example above, say, this investor`s share price drops from $50 to $35. Your account is now worth $7,000, triggering a $100 $US margin call.

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