Trying to understand margin.

# Thread: Trying to understand margin.

1. ## Trying to understand margin.

Hello all,

I am taking a course and it talked about margin but I did not feel that it allowed me to understand some of the aspects to the extent that I need too. I will start by saying I do not have a margin account and I am not intending to open one, I am just trying to get a better understanding.

I understand that margin is the amount that would be deposited to purchase the securities. And I understand margin calls and reduced margin ect.

This is where I get confused.
For simplicity we will use an example of a one stock portfolio not eligible for reduced margin.

So a person buys 1,000 shares, the total value of the shares is 50,000 (we will exclude commission in this example). Since we are not using reduced margin the client would need to put down \$25,000.00 for the securities, and 25,000 loaned out.

Now lets says the stocks rise \$10.00/share, the total value of the securities is \$60,000.00.
Has the loan increased to \$30,000.00 or has the loan stayed at \$25,000.00 or has the loan decreased to \$20,000.00?

Thanks,
Fraser

2. Originally Posted by Fraser19
Hello all,

I am taking a course and it talked about margin but I did not feel that it allowed me to understand some of the aspects to the extent that I need too. I will start by saying I do not have a margin account and I am not intending to open one, I am just trying to get a better understanding.

I understand that margin is the amount that would be deposited to purchase the securities. And I understand margin calls and reduced margin ect.

This is where I get confused.
For simplicity we will use an example of a one stock portfolio not eligible for reduced margin.

So a person buys 1,000 shares, the total value of the shares is 50,000 (we will exclude commission in this example). Since we are not using reduced margin the client would need to put down \$25,000.00 for the securities, and 25,000 loaned out.

Now lets says the stocks rise \$10.00/share, the total value of the securities is \$60,000.00.
Has the loan increased to \$30,000.00 or has the loan stayed at \$25,000.00 or has the loan decreased to \$20,000.00?

stock has increased \$10/share
total value of holding is \$60,000.
the loan has stayed the same at 25,000.
investor's personal equity has now jumped from 25,000 to \$35,000.
isn't it wonderful?

now suppose stock had fallen \$10/share.
total value of the holding is now \$40,000.
loan is unchanged at 25,000.
but investor's personal equity has now plunged to \$15,000.
isn't it horrible?

.

3. Originally Posted by humble_pie
stock has increased \$10/share
total value of holding is \$60,000.
the loan has stayed the same at 25,000.
investor's personal equity has now jumped from 25,000 to \$35,000.
isn't it wonderful?

now suppose stock had fallen \$10/share.
total value of the holding is now \$40,000.
loan is unchanged at 25,000.
but investor's personal equity has now plunged to \$15,000.
isn't it horrible?

.
Excellent, thank you.

Now to expand, in the first example since the value of the holdings has risen by 10,000. The account holder will also be able to borrow another 5,000 to purchase more shares. Correct?

4.

5. swimming in a lake 5' or 100' deep is the same until you get a cramp. You can bob to shore at 5'.

think of this when you think about taking on more margin.

6. Originally Posted by Fraser19
Excellent, thank you.

Now to expand, in the first example since the value of the holdings has risen by 10,000. The account holder will also be able to borrow another 5,000 to purchase more shares. Correct?
Yes.

Get a margin account.

7. Pfft, dont listen to these primadonas. Margin is a 50-70% interest only loan on the equities you currently hold. Just make sure you dont max the margin out and protect a bit from the downside and you will be fine. Buy something with low volatility like broad ETFs and protect against the 10-25% drop and you wont get a call.

8. I like to buy stocks that are rising in price and protect myself with a tight stoploss. Under the circumstances the risk of using margin is minimal, and if the stock goes up and I raise the stoploss above my cost price, then there is no risk at all.

9. NYSE margin debt close to all time highs the fed is no match for the margin clerks. The margin clerks will do what they are suppose to do & again the fed will not be able to stop the coming crash until then party on.

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