When you borrow money from a broker to purchase stocks, you are buying on margin. The Federal Reserve Board requires that you personally invest at least 50 percent of the stock's full purchase price to satisfy the initial margin. You also need to maintain a minimum of 25 percent equity in the trade, which is called the maintenance margin. If the stock price drops, you could fail to meet this requirement. At that point, you will be issued margin call to deposit additional funds so that you will meet the maintenance margin.
1. Call your broker and verify the initial and maintenance margins. Brokerages may require higher margins than mandated by the Federal Reserve Board.
2. Multiply the initial margin rate, in decimal format, by the total purchase price of the stock. This derives the initial margin. As an example, if you wanted to purchase 100 shares of a $50 stock with a 60 percent initial margin, you multiply 0.60 times $5,000 to derive an initial margin of $3,000. Therefore, you would have to invest $3,000 of your own money.
3. Multiply the maintenance margin rate, in decimal format, by the current stock value to determine the maintenance margin. In the example, If the stock dropped to $21 per share, or a total value of $2,100, you would be required to maintain $525 in equity in your margin account. This can be cash or stock equity.
4. Subtract the original loan amount from the current value of the stock. This gives you your current equity. Then subtract the equity requirements from the maintenance margin to see if you need to deposit more money. If the figure is negative, you do not meet the minimum equity and will receive a margin call to deposit additional funds. In the example, when the stock dropped to $21, its value was $2,100. Subtracting the original $2,000 loan gives you an equity of just $100. Subtracting the maintenance margin's required equity of $525 tells you an additional $425 must be deposited for the margin call.
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