FINA3331-Buying_on_the_margin - Buying on the margin...

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1 Buying on the margin Investor opens a margin account Deposits into this account cash or securities Borrows up to 50% of the securities’ value he/she wants to buy from his/her broker Buys the securities which are then deposited into the same account If the maintenance margin is not satisfied the investor will receive a call to add additional funds to his/her account so that the maintenance margin is satisfied Can close the potion by selling the securities and paying off the loan Initial or original margin: Minimum amount of cash or other eligible type of securities owned by the investor that have to be deposited into one’s brokerage account (as set by the Federal Reserve Board (Fed)) before buying on the margin. Since it sets the minimum amount required to be deposited into the account by the investor, it also sets the maximum amount the investor can borrow from his/her broker. For simplicity, at our level we will assume that the investor can only deposit cash into his brokerage account and that he is not charged any interest on the borrowed amount by his/her broker (remember nothing is free in real life). If x is the initial margin, then the minimum amount or value of the securities the investor needs to deposit at time t=0 and represented by equity 0 is given by equity 0 =x*(P 0 *Q) where x= initial margin, P 0 =the stock price of the security the investor wants to buy on margin at t=0 and Q= number of shares. Maximum amount the investor can borrow, Loan=(1-x)* (P 0 *Q).
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This note was uploaded on 06/02/2011 for the course FINA 3331 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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FINA3331-Buying_on_the_margin - Buying on the margin...

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