Margin trading, Financial Management

Margin Trading:

Suppose an investor wants to buy 100 Reliance Energy shares, whose market price is Rs.500. This transaction requires Rs.50,000 but the investor has only Rs.30,000 as bank balance. He can approach a broker who will invest money on his behalf, taking interest for the same. Now he invests 50% of the amount (i.e., Rs.25,000) and the broker puts in the other half on his behalf and buys 100 Reliance shares in his name. Suppose maintenance margin is 40%, and if it falls below 30%, the broker has the right to sell the stock. Now the stock may fall to Rs.410, then the loss is Rs.90 per share. In this case, the loan from the broker is still Rs.25,000 but the investor's own account equity will fall to Rs.16,000. Now his maintenance margin equals 39.02% (Equity Account/Market Value of Holding x 100 i.e., 16,000/41,000 x 100). In this case the broker can ask him for the balance to take the margin to the 40% mark. He has to deposit (41,000 ´ 40% - 16,000) or Rs.400 to maintain the level of 40%.

Now, assume a market crash whereby the Reliance Energy shares fall to Rs.350. The margin loan still remains at what he originally took, i.e., Rs.25,000, but now his equity account falls to Rs.10,000. The maintenance margin has come down to only 28.57% (10,000/3,35,000 x 100). Thus, the investor can sell the shares and recover the balance amount when he is not able to fulfill the margin requirement that newly arose.

Posted Date: 9/10/2012 6:15:24 AM | Location : United States







Related Discussions:- Margin trading, Assignment Help, Ask Question on Margin trading, Get Answer, Expert's Help, Margin trading Discussions

Write discussion on Margin trading
Your posts are moderated
Related Questions
The issuer will not have to disclose the rating to the public. The firm can, either independently or with the help of its investment banker, assess its shadow

Define a Convertible Bond A convertible bond issue permits the investor to exchange the bond for a pre-defined number of equity shares of the issuer.  The convertible bond’s fl

what are the arguments in favour of profit maximization?

Calculated betas provide different information if they are obtained by using daily, weekly or monthly data. Which data is the most appropriate? Fernández and Carabias (2007) an

Name two patterns of cash flows for a share of common stock. How does the market determine the value of the most common cash flow pattern for common stock? Cash flows for a sha

What does it mean when we say that the correlation coefficient for two variables is -1? What does it mean if this value were zero? What does it mean if it were +1? Correlation

Issuer's Considerations Cash Flows: Issuers may consider the period for which the funds are required and try to spread the borrowings in a way to minimize the costs. Generally,

uses and limitations of the marginal weighting system

Q. Define Double-Entry Bookkeeping? Double-Entry Bookkeeping - Method of recording financial transactions in that every transaction is entered in two or more accounts and inclu

QUESTION 1 (a) What do you understand by the term Civil Society Organisations? (b) Distinguish between sectional and promotional groups. Give examples to support your answer