Lifetime of Excess Weight

Maintenance margin excess

Once the margin call generated by an initial purchase or short sale (remember that this is called a Fed Call) has been satisfied, the various values in the margin account (customer equity, debit (loan) balance, and total market value) will change as the market prices of the securities held change. When the market value of the securities purchased go up, the customer equity increases.

For example, a customer opens a margin account and purchases 100 shares of ABC at $55. The total cost of the purchase is $5, 500. The customer hasn't sent in any money yet, so his account looks like the following:

Market Value:

$5, 500 (100 ABC @ 55)

Debit Balance:

-5, 500 (owed to broker)

Customer Equity:


The customer will be issued a margin call (Fed Call) for 50% of the purchase price of the securities purchased. 50% of $5, 500 is $2, 750. The customer immediately sends in his check for $2, 750 and after it is posted, his account looks like the following:

-2, 750 (owed to broker)

2, 750


Let's assume that the ABC stock that the customer bought goes up to $65 per share from the $55 that it was purchased for. We'll assume that everything else stays the same. The various components of the margin account will now look like this:

$6, 500 (100 ABC @ 65)

3, 750


The changes to the account balances from an increase in the market price of the stock are:
  1. The market value of the securities in the account increased from $5, 500 to $6, 500.
  2. The customer's equity increased from $2, 750 to $3, 750.
Any change to a margin account (increase in market value, a purchase or sale, a deposit or withdrawl of cash, etc.) always affects only two of the three account components.

The 100 shares of ABC in the account could now be sold for $6, 500. After paying the brokerage firm the $2, 750 owed on the margin loan, the customer could withdraw a check for the remaining $3, 750.

EXCESS EQUITY

The initial requirement for an account that purchases $50, 000 worth of stock is $25, 000. The customer is required to have $25, 000 worth of equity in order to purchase $50, 000 worth of stock. Put another way, the initial equity requirement for a stock purchase on margin is 50% of the amount purchased. Reminder: this is a Fed requirement.

Let's look at what happens when another customer (Customer B) purchase 100 shares of ABC stock, just like the customer in our first example (who we'll call Customer A). But instead of buying the stock at $55 per share, Customer B pays $65 per share, and promptly deposits a check for $3, 250 (equal to 50% of the purchase price of $6, 500).

Here is how the two accounts compare at this point:

Customer A

Customer B

$6, 500

-2, 750

3, 250


Comparing the two accounts, we can see that Customer B has met the 50% initial equity requirement and his account is in good condition, but Customer A's account is in even better shape, with greater than 50% equity in the account. The requirement is for equity of $3, 250, but thanks to the rise in the price of ABC stock, actual equity is $3, 750, $500 more than the requirement.
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Self-Regulatory Organizations; ICE Clear Europe Limited; Order Granting ..  — Insurance News Net
ICE Clear Europe states that the changes to the Risk Policy amend the calculation of CDS initial margin requirements to comply with margin requirements under EMIR Article 41 and Article 24 of the implementing Regulatory Technical Standards. /5/ ICE ..

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Popular Q&A

avatar
Since Obama hates insurance co.s and their "excessive" 2.2% profit margin, what is the "right" profit margin?

Why doesn't Obama come out and say how much that massive 2.2% margin should be cut back?

Yep, just more deception from the master.
Just read a article in IBID describing how bo is set to pay the insurance companies off if his
health care take over succeeds--to the tune of almost a half a trillion .
Sure, they supposedly are raping us, but the real thief, (BO) will steal from us and give to them!!
THanks for asking,
Randy

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