Understanding Margin Accounts

Questions and Answers

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?

$15,000

$10,000

$12,500 (correct)

$25,000

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?

The account value drops leading to a margin call Signup and view all the answers

If the maximum loan put up by the firm is $12,500, what is the total purchase cost of the ABC shares?

$25,000 Signup and view all the answers

Assuming a client borrows 50% of the total investment for ABC shares, how would the required margin react to a price drop?

Increase due to loss in equity value Signup and view all the answers

Which of the following statements about margin accounts is true?

Margin calculations help understand long margin accounts affected by stock price changes Signup and view all the answers

In a margin account, what is the consequence of maintaining a loan ratio of 50%?

It can lead to a larger loss if stock prices decline Signup and view all the answers

What is the minimum margin requirement for short selling listed equities priced at $1.80?

60% of market value Signup and view all the answers

How much money must an investor deposit in their account to short stocks priced at $0.20 per share?

$0.25 per share Signup and view all the answers

If an investor shorts shares priced at $2.50, what percentage of the market value must be deposited as a margin?

50% Signup and view all the answers

What total percentage of the market value must an investor maintain in their account when shorting stocks at $1.75 per share?

180% Signup and view all the answers

In a short sale, what does the client provide to potentially cover losses?

Additional cash in the account Signup and view all the answers

For a stock priced at $1.25, how much margin based on market value is required?

100% Signup and view all the answers

What is the requirement for securities eligible for reduced margin?

30% of market value Signup and view all the answers

If an investor shorts shares worth $4.00 each, what is the total margin required including the short sale proceeds?

150% of the market value Signup and view all the answers

To short common shares at a price of $1.55, what total percentage must an investor have in their account?

180% Signup and view all the answers

What margin requirement applies to short sales of stocks under $0.25?

$0.25 per share Signup and view all the answers

What must be marked on an order placed by an employee of the dealer member?

PRO or EMP/N-C Signup and view all the answers

What is the primary characteristic of clients with margin accounts compared to those with cash accounts?

They can engage in short selling. Signup and view all the answers

How is the minimum margin required calculated for a transaction?

Cost of transaction minus the loan amount. Signup and view all the answers

What profit scenario applies to a short margin position?

Profit occurs when the sale price exceeds the subsequent repurchase cost. Signup and view all the answers

What type of order is filled first if selling orders exist for a stock before an employee's order?

Any client orders to sell Signup and view all the answers

What is the role of margin in a long margin position?

It is the amount the investor borrows to finance the purchase. Signup and view all the answers

What is the main expectation of an investor when engaging in short selling?

The price of the stock will fall Signup and view all the answers

What must an investor do to establish a short position?

Borrow the securities and sell them before ownership Signup and view all the answers

What action must be taken to cover a short sale?

Buying back the securities at the current market price Signup and view all the answers

What financial obligation does a seller in a short sale have?

The seller is obliged to eventually repurchase the securities Signup and view all the answers

How is the margin requirement for a short position typically determined?

As a percentage of the sale proceeds plus a fixed amount per share Signup and view all the answers

What consequence might an investor face if the price of the stock rises after a short sale?

The need to buy back the securities at a higher price, leading to a loss Signup and view all the answers

What must be declared at the time of a short sale?

The intention to sell short Signup and view all the answers

What might happen if a lender is not available for the securities sold short?

The client must buy back the securities at the current market price Signup and view all the answers

What role does the investment advisor play in a short sale?

The advisor facilitates the borrowing of securities and execution of the short sale Signup and view all the answers

What is the total minimum account balance required to sell short 100 shares of FED Company Ltd. at a market price of $5.00?

$750.00 Signup and view all the answers

If the price of FED's shares declines to $1.60, what would the new minimum account balance required be?

$600.00 Signup and view all the answers

After the price of FED's shares falls to $4.00, how much excess margin does the client have in the account?

$150.00 Signup and view all the answers

What percentage of the market value must the client maintain in their margin account when selling short?

150% Signup and view all the answers

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?

$5.00 Signup and view all the answers

How can the excess margin of $150.00 be utilized by the client?

Used to cover margin calls or withdrawn. Signup and view all the answers

In the first scenario where the price declines to $4.00, what is the new margin required after the decline?

$100.00 Signup and view all the answers

What happens to the margin account balance when the client encounters a margin call following a price increase after a decline?

The client must deposit more funds. Signup and view all the answers

What will happen if the price of FED's shares rises above the original selling price of $5.00?

The client faces a margin call due to reduced margin. Signup and view all the answers

What is the initial margin deposited by the client for selling short the shares?

$250.00 Signup and view all the answers

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.