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MARGIN CALL

Discuss MARGIN CALL within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; IF THE EQUITY (VALUE OF SECURITIES MINUS WHAT BROKERAGE YOU OWE) IN THE INVESTOR’S ACCOUNT FALLS BELOW THE MAINTENANCE MARGIN, ...

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Abhijeet S
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MARGIN CALL - September 13th, 2010

IF THE EQUITY (VALUE OF SECURITIES MINUS WHAT BROKERAGE YOU OWE) IN THE INVESTOR’S ACCOUNT FALLS BELOW THE MAINTENANCE MARGIN,


THE BROKERAGE WILL ISSUE A ‘MARGIN CALL’ REQUIRING THE INVESTOR TO EITHER LIQUIDATE HIS POSITION IN THE STOCK OR ADD MORE CASH TO THE ACCOUNT.


EXAMPLE :
YOU PURCHASE RS. 20000 WORTH OF SECURITIES BY BORROWING RS. 10000 FROM YOUR BROKERAGE & PAYING RS.10000 YOURSELF.
IF THE MARKET VALUE OF THE SECURITIES FALLS TO RS.15000, THE EQUITY IN YOUR ACCOUNT FALLS TO 5000 (15000 - 10000 = 5000).


CASE 1:

ASSUMING A MAINTENANCE REQUIREMENT OF 25%, YOU MUST HAVE RS. 3750 IN YOUR ACCOUNT.(25% OF 15000 = 3750).


THEN, YOU ARE FINE IN THIS SITUATION AS THE RS.5000 WORTH OF EQUITY IN YOUR ACCOUNT IS GREATER THAN THE MAINTENANCE MARGIN OF RS.3750.




CASE 2
ASSUMING A MAINTENANCE REQUIREMENT OF 40%, YOU MUST HAVE RS. 6000 IN YOUR ACCOUNT(40% OF 15000 = 6000). IN THIS CASE, YOUR EQUITY OF RS.5000 IS LESS THAN THE MAINTENANCE MARGIN OF RS.6000.


AS A RESULT, THE BROKERAGE WILL ISSUE YOU A ‘MARGIN CALL’.
IN THIS CASE, THE BROKERAGE HAS THE RIGHT TO SELL YOUR SECURITIES TO INCREASE YOUR ACCOUNT EQUITY UNTIL YOU ARE ABOVE THE MAINTENANCE MARGIN.

THE BROKER MAY NOT EVEN BE REQUIRED TO CONSULT YOU BEFORE SELLING.
YOU CANNOT EVEN CONTROL WHICH STOCK IS SOLD TO COVER THE MARGIN CALL.
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