Question

Assume that you bought 100 shares of stock X at $50 per share in your margin account that has an initial margin of 60%. What would be the actual margin if the price rises to $70?

1. $28.57
2. $1.43%
3. $71.34
4. $17.43%

Answer 1

Upon purchasing 100 shares at $50 with an initial margin of 60%, and the price increasing to $70, the actual margin is calculated as equity divided by current market value. The actual margin is found to be 52.38%, with an equity of $3,666.67 and a current market value of $7,000.

Step-by-step explanation:

The initial margin in this case is 60%, and you bought 100 shares of stock X at $50 per share. So you invested $5,000 of your own money (60% of the total purchase amount, which is $8,333.33). If the price rises to $70, your equity in the stock would be the current market value minus what you owe.

Your investment is now worth 100 shares × $70/share = $7,000.

Since you only borrowed $3,333.33 (the remaining 40%) to purchase the shares, your loan amount stays the same.

The actual margin is calculated as:

Equity / Current Market Value = ($7,000 - $3,333.33) / $7,000 = $3,666.67 / $7,000

Actual margin = 52.38%

So, with the increased stock price, your actual margin in percentage terms has decreased from the initial 60% because the price increase has increased the denominator (Current Market Value).