Financial Markets For The Rest Of Us|
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
32 shares x $35 per share = $1,120
of which $400 is your money and the other $720 would be your margin. And what happens if you decide to ignore the margin call? You will then be at the mercy of your broker, who at her discretion may sell all or part of your holdings in order to meet the margin requirement. At any rate always remember that what you borrow must be paid back in full plus the interest. But also keep in mind that whatever you make with the margin amount is yours to keep. You are only responsible for the margin that you are using.
This brings us to the other side of the story. Now suppose your stock increases in value to let's say from the original buy price of $50 to $80 per share. Now your 40 shares would be worth
40 x $80 = $3,200
Knowing that your used margin level is still at $1,000, your equity has increased to $2,200. Your broker will quite possibly increase your margin another $1,200. This means that now you have an extra $1,200 in credit to buy stocks with. Of course you don't have to make any purchases with the extra margin. It's just an increase in your credit limit. Some brokerages even allow you to borrow this amount in cash to use any way you like. Just remember that when your account is fully margined, you have no leeway, and if your equity drops below 50% of your total account value, you will receive a margin call.
There is one more point that I need to make about margin, and that is you cannot buy all types of stocks on margin, only marginable securities. These are stocks that are deemed safer and less volatile. Stocks with values less that $3 per share (also known as penny stocks) quoted on OTC bulletin board or pink sheets are generally not …
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