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Classmate 1 –Jes (10% decline)
Stock
Market Price
Quantity-Round Lot
Total price of One Round Lot
Initial Margin
Initial Margin Cost
Microsoft (MSFT)
$336.44
100
$33,644.00
50%
$16,882
The stock of choice is Microsoft with a market price of $336.44 and a round lot of 100, which gives us $33,644.00. The Federal Reserve Board Regulation has a requirement of 50%; moreover, with a 50% margin my initial cost would total $16,882. According to the textbook,
The Board of Governors of the Federal Reserve System (Fed), using Regulation T, has the authority to specify the initial margin. Historically, the initial margin for stocks has ranged between 40 and 100 percent; it has been 50 percent since 1974.12 The initial margin can be defined as
Initial margin= Amount investor contributes/ Value of the transaction (Jones & Jensen, 2020, p128).
The broker requires a maintenance margin of 30%, so that puts Microsoft at $10,093.20. The maintenance margin is the minimum amount of margin or equity that has to be in the account. If there are any losses and the investor borrowed money from a broker, then the amount must be replaced.
Classmate 2- B (20% decline)
I have chosen one stock and structured a margin transaction to purchase one round lot of stock based on the requirements in Stock-Trak.
Stock
Market Price
One Round Lot Stock Count
Total Price of One Round Lot
JPMorgan Chase & Co. (JPM)
$168.29
100
$16,829
After determining the chosen stock, market price, and the price of one round lot of stock, the initial margin and maintenance margin can be calculated. Margin is the equity that an investor has in a transaction. According to the reading this week, “The initial margin requirement must be met when the transaction is initiated, but the maintenance margin must be met on an ongoing basis.” (Jones & Jenson, 2020). The current initial margin requirement set by the Fed is 50%. The next step is to multiply the purchase price by the initial margin requirement of 50%. The calculation would be as follows: $16,829 x 50% = $8,414.50. Now the maintenance margin can be calculated. The maintenance margin is the percentage of the value of a transaction that must be on hand at all times as equity (Jones & Jenson, 2020). Brokers generally require 30%. FINRA states that 25% of the total value of the securities margin account is required. For this example, 30% will be utilized as the percentage of the transaction that must be on hand at all times.. The formula for maintenance margin multiples the total investment by the percentage required to be on hand. The calculation for maintenance margin would be as follows: $16,829 x 30% = $5,048.70. This means that the equity in the margin account must be at least $5,048.70.
Some investors may rely strictly on the cash they have on hand when making investment decisions. Leverage gives an investor a way to borrow money or increase the number of shares involved in a trade beyond the number of shares which could be afforded with only cash (Porter, 2021). An example is trading on margin. Trading on margin means that an investor borrows money from a broker to make an investment by using other assets in a brokerage account as collateral (Porter, 2021). Generally, when one references a company or investor as “highly leveraged”, this means that the company or investor has more debt than equity. For this transaction, the use of margin can be used as leverage which would allow the investor to increase their buying power in the financial market by using existing cash or securities as collateral.
Guided Response : Assume the market price of your classmates’ stock declines by 10% for one classmate and 20% for a second. In the post to each classmate, (minimum of 200 words) address the following:
- Calculate and explain the margin call.
- Explain the actions that the broker can take to meet the margin call.
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