Agreement Margin Meaning

The broker may review the value of collateral (margin) at any time after the risk assessment, for example. B based on market factors. If this results in the market value of the security of a margina account being covered by the revised margin, the broker or exchange immediately issues a “margin call” requiring the investor to reconcile the margin account. To do this, the investor must either deposit funds (the call) into the margin account, provide additional guarantees or sell a portion of the securities. If the investor does not reconcile the account, the broker can sell the investor`s security in order to reconcile the account. Suppose the maintenance margin is 25%. This means that the client must respect a net worth of 25% of the total share capital. This means that they must have a net capital of $50,000 × $0.25 – $12,500. So at what price would the investor receive a margin call? For the P share price, the share capital (in this example) is 1,000P. If a margin call is unexpected, it can result in a domino effect of the sale, which leads to other margin calls, etc., and effectively causes an asset class or asset class to fall. The silver market crash on March 27, 1980 is an example of the “Bunker Hunt Day” of the money market. This most often occurs due to a negative change in the market value of the asset or contract.

This could also happen if the margin requirement is raised, either due to increased volatility or legislation. In extreme cases, some securities may no longer be eligible for margin trading; in this case, intermediation will require the trader to either fully finance his position or liquidate him. It is also possible to calculate P with P -P 0 (1 – initial) (1 – Maintenance margin request), “display style” p-P_{0}, “frac” (1- , text-initial) “P0 being the starting price of the action. With the same example to demonstrate: Suppose an investor with 2,500 $US on a margin account wants to buy Nokia`s stock for $5 per share. The client could use additional margina funds of up to 2500 $US provided by the broker to purchase Nokia shares valued at $5,000 or 1,000 shares. If the stock rises to $10 per share, the investor can sell the shares for $10,000. If they do, after refunding the $2,500 USD of the invested broker and without the original $2,500, the trader earns $5,000. The investor has the potential to lose more money than the funds deposited into the account.

For these reasons, a margin account is only suitable for a demanding investor with a thorough understanding of additional investment risks and trading requirements with Margin. Not all shares can be purchased with Margin. The Federal Reserve Board defines stocks that are at the margin.