Trying to understand margin.
Results 1 to 8 of 8

Thread: Trying to understand margin.

  1. #1
    Senior Member
    Join Date
    Aug 2013
    Posts
    398

    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. #2
    Senior Member humble_pie's Avatar
    Join Date
    Jun 2009
    Posts
    11,693
    Quote Originally Posted by Fraser19 View Post
    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. #3
    Senior Member
    Join Date
    Aug 2013
    Posts
    398
    Quote Originally Posted by humble_pie View Post
    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. Remove Advertisements
    CanadianMoneyForum.com
    Advertisements
     

  5. #4
    Senior Member
    Join Date
    Mar 2013
    Location
    Mississauaga Canada
    Posts
    335
    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. #5
    Senior Member
    Join Date
    Sep 2013
    Posts
    1,990
    Quote Originally Posted by Fraser19 View Post
    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.
    We can not know things as they are in themselves, but only as they appear to us.

  7. #6
    Senior Member tygrus's Avatar
    Join Date
    Mar 2012
    Posts
    1,164
    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. #7
    Senior Member
    Join Date
    Jan 2012
    Posts
    2,636
    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. #8
    Senior Member
    Join Date
    Sep 2016
    Posts
    533
    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.


Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •