Lecture4_Examples - 2/22/2011 Buying on Margin EXAMPLES OF...

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2/22/2011 1 EXAMPLES OF BUYING ON ECON 435 An Wang Buying on Margin Two important concepts: 1. Initial Margin = fraction of your total security holdings that initially needs to be financed with your own funds (Set by the FED at 50%) 2. Maintenance margin = percentage of your total security holdings that needs to be covered by your net worth. EXAMPLE 1 You want to buy as many shares of Google as you can now. The stock price of Google is $500, and you only have $10k. If you are allowed to buy on margin, how many shares of Google can you buy now? Solution: All the money you can use to buy stock = money you have + money you can borrow (margin) = $10k + $10k = $20k Shares of Google = (All the money you can use)/(Stock price of Google) = $20k/$500= 40 EXAMPLE 2 After you buy the stock for a week, the stock price of Google went down to $400. What is the margin of your stock account now? Will you get a margin call from your broker? Solution:
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Lecture4_Examples - 2/22/2011 Buying on Margin EXAMPLES OF...

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