Podcast
Questions and Answers
What is the correct formula to calculate the margin requirement?
What is the correct formula to calculate the margin requirement?
- Original purchase price - loan amount (correct)
- Loan amount
- Selling price - purchase price
- Total cost + loan amount
If a client buys 1,000 shares at $25 each and finances 50% through a loan, how much money does the client initially put up?
If a client buys 1,000 shares at $25 each and finances 50% through a loan, how much money does the client initially put up?
- $15,000
- $10,000
- $12,500 (correct)
- $25,000
What happens to the margin account if the price of ABC stock rises to $29?
What happens to the margin account if the price of ABC stock rises to $29?
- Margin requirement remains unchanged
- Margin requirement doubles
- Margin requirement increases significantly
- Margin requirement decreases (correct)
In Scenario 1, if the price of ABC stock declines to $22, what is the overall impact on the margin account?
In Scenario 1, if the price of ABC stock declines to $22, what is the overall impact on the margin account?
If the maximum loan put up by the firm is $12,500, what is the total purchase cost of the ABC shares?
If the maximum loan put up by the firm is $12,500, what is the total purchase cost of the ABC shares?
Assuming a client borrows 50% of the total investment for ABC shares, how would the required margin react to a price drop?
Assuming a client borrows 50% of the total investment for ABC shares, how would the required margin react to a price drop?
Which of the following statements about margin accounts is true?
Which of the following statements about margin accounts is true?
In a margin account, what is the consequence of maintaining a loan ratio of 50%?
In a margin account, what is the consequence of maintaining a loan ratio of 50%?
What is the minimum margin requirement for short selling listed equities priced at $1.80?
What is the minimum margin requirement for short selling listed equities priced at $1.80?
How much money must an investor deposit in their account to short stocks priced at $0.20 per share?
How much money must an investor deposit in their account to short stocks priced at $0.20 per share?
If an investor shorts shares priced at $2.50, what percentage of the market value must be deposited as a margin?
If an investor shorts shares priced at $2.50, what percentage of the market value must be deposited as a margin?
What total percentage of the market value must an investor maintain in their account when shorting stocks at $1.75 per share?
What total percentage of the market value must an investor maintain in their account when shorting stocks at $1.75 per share?
In a short sale, what does the client provide to potentially cover losses?
In a short sale, what does the client provide to potentially cover losses?
For a stock priced at $1.25, how much margin based on market value is required?
For a stock priced at $1.25, how much margin based on market value is required?
What is the requirement for securities eligible for reduced margin?
What is the requirement for securities eligible for reduced margin?
If an investor shorts shares worth $4.00 each, what is the total margin required including the short sale proceeds?
If an investor shorts shares worth $4.00 each, what is the total margin required including the short sale proceeds?
To short common shares at a price of $1.55, what total percentage must an investor have in their account?
To short common shares at a price of $1.55, what total percentage must an investor have in their account?
What margin requirement applies to short sales of stocks under $0.25?
What margin requirement applies to short sales of stocks under $0.25?
What must be marked on an order placed by an employee of the dealer member?
What must be marked on an order placed by an employee of the dealer member?
What is the primary characteristic of clients with margin accounts compared to those with cash accounts?
What is the primary characteristic of clients with margin accounts compared to those with cash accounts?
How is the minimum margin required calculated for a transaction?
How is the minimum margin required calculated for a transaction?
What profit scenario applies to a short margin position?
What profit scenario applies to a short margin position?
What type of order is filled first if selling orders exist for a stock before an employee's order?
What type of order is filled first if selling orders exist for a stock before an employee's order?
What is the role of margin in a long margin position?
What is the role of margin in a long margin position?
What is the main expectation of an investor when engaging in short selling?
What is the main expectation of an investor when engaging in short selling?
What must an investor do to establish a short position?
What must an investor do to establish a short position?
What action must be taken to cover a short sale?
What action must be taken to cover a short sale?
What financial obligation does a seller in a short sale have?
What financial obligation does a seller in a short sale have?
How is the margin requirement for a short position typically determined?
How is the margin requirement for a short position typically determined?
What consequence might an investor face if the price of the stock rises after a short sale?
What consequence might an investor face if the price of the stock rises after a short sale?
What must be declared at the time of a short sale?
What must be declared at the time of a short sale?
What might happen if a lender is not available for the securities sold short?
What might happen if a lender is not available for the securities sold short?
What role does the investment advisor play in a short sale?
What role does the investment advisor play in a short sale?
What is the total minimum account balance required to sell short 100 shares of FED Company Ltd. at a market price of $5.00?
What is the total minimum account balance required to sell short 100 shares of FED Company Ltd. at a market price of $5.00?
If the price of FED's shares declines to $1.60, what would the new minimum account balance required be?
If the price of FED's shares declines to $1.60, what would the new minimum account balance required be?
After the price of FED's shares falls to $4.00, how much excess margin does the client have in the account?
After the price of FED's shares falls to $4.00, how much excess margin does the client have in the account?
What percentage of the market value must the client maintain in their margin account when selling short?
What percentage of the market value must the client maintain in their margin account when selling short?
If the proceeds from the short sale are $500.00, what is the value of the market price when the required margin is first established?
If the proceeds from the short sale are $500.00, what is the value of the market price when the required margin is first established?
How can the excess margin of $150.00 be utilized by the client?
How can the excess margin of $150.00 be utilized by the client?
In the first scenario where the price declines to $4.00, what is the new margin required after the decline?
In the first scenario where the price declines to $4.00, what is the new margin required after the decline?
What happens to the margin account balance when the client encounters a margin call following a price increase after a decline?
What happens to the margin account balance when the client encounters a margin call following a price increase after a decline?
What will happen if the price of FED's shares rises above the original selling price of $5.00?
What will happen if the price of FED's shares rises above the original selling price of $5.00?
What is the initial margin deposited by the client for selling short the shares?
What is the initial margin deposited by the client for selling short the shares?
Study Notes
Margin Requirements
- Margin requirement equals the difference between the original purchase price and the loan.
- Commissions are excluded from calculations.
Long Margin Position Example
- Client buys 1,000 shares of ABC Company at $25 each, totaling $25,000.
- Client's investment: $12,500 (50% margin put up).
- Firm loans $12,500 (50% of purchase price).
Scenarios Affecting Margin Account Values
- Scenario 1: Stock price declines to $22, affecting account value negatively.
- Scenario 2: Stock price increases to $29, enhancing account value positively.
Short Selling Overview
- Short selling involves selling securities not owned, creating a short position.
- Expected outcome: buy back securities at a lower price for profit.
- Seller deposits margin to cover potential losses.
Short Sale Process
- Client intends to sell short at $10 per share.
- Firm lends the securities to client for short sale proceeds deposited in account.
- Client must maintain margin of $5 per share, ensuring adequate funds in account.
- Prices may rise, potentially resulting in losses, requiring close monitoring.
Minimum Margin Requirements for Short Sales
- Listed Equities Price Structure:
- $2.00 and over: 50%
- $1.75 to $1.99: 60%
- $1.50 to $1.74: 80%
- $0.25 to $1.49: 100%
- Under $0.25: $0.25 per share
- Eligible for reduced margin: 30%
Example of Shorting Common Shares
- To short at $5.00, the client needs to deposit 150% of market value.
- Minimum account balance calculated as proceeds from the short sale plus required margin.
Illustration of Short Selling Scenarios
- Scenario 1: Stock price drops to $4.00, client has excess margin in account.
- Scenario 2: Stock price falls to $1.60; different regulations apply for dealer members.
Summary of Equity Transactions
- Margin accounts allow buying/selling on credit, can hold long or short positions.
- Long position: financing purchase, profiting from rising stock prices.
- Short position: selling what's not owned, profiting when repurchasing at lower costs.
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Description
This quiz explores the concept of margin requirement in stock trading. It clarifies the relationship between the original purchase price and the loan amount, enhancing your comprehension of how stock prices impact margin accounts. Review examples to better grasp these crucial financial principles.
