How to Calculate Buying Stock on Margin in Finance

by C. Taylor, studioD

Buying a stock on margin allows you to purchase more than you normally could by borrowing from the brokerage. The U.S. Securities and Exchange Commission only allows investors to borrow up to 50 percent of the total stock purchase price when borrowing on margin. In addition, you must maintain at least 25 percent of the total stock value as equity in your margin account, or you risk a margin call for additional funds.

Multiply the total purchase price of the stock by the initial margin percentage to calculate your initial deposit. Although the Federal Reserve Board requires you deposit at least 50 percent of the purchase price, some brokerages may require more. For example, if you wanted to purchase 100 shares of a company for $50 per share, your total purchase price would be $5,000. If the brokerage required a 60 percent deposit, multiply $5,000 by 0.60 to get an required initial margin of $3,000. This amount must be deposited into your margin account. That also means you will be borrowing the additional $2,000.

Multiply any changes in value by the minimum maintenance margin percentage to calculate the amount of equity you must keep in the account. In the example, if the stock drops to $25 per share, then the value would be $2,500. If your brokerage requires a 25 percent maintenance margin, you would multiply this new value by 0.25 to calculate the minimum margin of $625. This represents the amount of equity you must keep in the account.

Subtract the amount you borrowed from the current value to calculate the amount of equity you have. In the example, subtracting the borrowed $2,000 from $2,500 gives you equity of $500.

Subtract the equity from the required maintenance margin to calculate your margin call, which is the amount you must deposit to meet the requirements. In the example, $625 minus $500 gives you a margin call of $125.

About the Author

C. Taylor embarked on a professional writing career in 2009 and frequently writes about technology, science, business, finance, martial arts and the great outdoors. He writes for both online and offline publications, including the Journal of Asian Martial Arts, Samsung, Radio Shack, Motley Fool, Chron, Synonym and more. He received a Master of Science degree in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences at College of Charleston. He also holds minors in statistics, physics and visual arts.

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