Margin Trading
Prior to beginning work on this discussion forum, complete the learning activity Register on Stock-Trak Simulation and read in your textbook Chapter 5, How Securities Are Traded. Choose one stock and structure a margin transaction to purchase one round lot of a stock based on the requirements in your account on Stock-Trak.
Initial Post: In your initial post, provide the following:
A table describing this margin transaction includes the following:
The stock, the market price, and the total price of one round lot
The initial margin (calculation and dollar amount)
The maintenance margin (calculation and dollar amount)
Explain to your classmates the impact of leverage on this transaction.
Margin Trading
Shares are a small part of a large amount or a small part of the ownership of the company that issues the share. The company issues shares and sells them for funding. Shares can be sold in lots or individually. The share price is not fixed it depends on the performance of the company.
The initial margin is a portion of the total amount that must be paid to buy the allotted shares by the shareholder. The remaining amount should be paid by the brokerage farm. Federal Reserve Board’s Regulation recently changed the percentage to 50 %, which means the shareholder must pay 50% of the amount (risk.net, 2022).
The maintenance margin is the minimum amount of equity that an investor should have in his margin account after any purchase of a share happens. The trader or investor must have or deposit 25% of the total security amount in the margin account to hold the position. Financial Industry Regulatory Authority (FINRA) fixed this maintenance margin at 25% (sec.gov, 2009)
For example:-
Let’s think this is a portfolio of one of my friends. He buys 10 lots of a particular share where every lot holds 10 shares. The price of every share is $ 50. It means he has a total of 100 shares of price $ 50 each so the total price of the shares is (100 * $ 50) = $ 5000;
The initial margin is set at 50 % so he must have to pay at least an amount of (5000 * 50 %) = $ 2500; the remaining amount should be paid by the brokerage farm where you have your marginal account.
The maintenance margin is 25 % so my friend must have to deposit a minimum amount of (5000 *25 %) = $ 1250 to his margin account in that particular brokerage farm.
Reference list
risk.net (2022) Initial margin, Retrieved from: https://www.risk.net/definition/initial-margin-im [Retrieved on: 19th October 2022]
sec.gov (2009) Margin: Borrowing Money to Pay for Stocks, Retrieved from: https://www.sec.gov/reportspubs/investor-publications/investorpubsmarginhtm.html [Retrieved on: 19th October 2022]
