Investment Analysis and

Portfolio Management

Security Markets -3

Margin Trading: Long Position

Using both borrowed money and equity for an
investment.
Maximum margin
Set by the SEC for different shares.

Initial margin
Initial equity the investor must have in the account.

Maintenance margin
Minimum level the equity margin can be.

Margin call
Call for more equity funds to bring the account to the
initial margin level.

a) Margin Trading: Initial Margin

Company
Initial Margin
Maintenance Margin
Market Price
# Shares Purchased

: X Corp
: 50%
: 40%
: $70 per share
: 1,000

Q: What are the initial equity and loan balances in the

account?
Balance Sheet: Initial Position
Assets
Liabilities and Equity
Investment $70,000 Money borrowed
$35,000
Equity
$35,000

b) Margin Trading : Maintenance Margin

Stock price falls to $60 per share.
Q: What are the updated equity and loan balances in the
account? At this price, will you get a margin call?
Balance Sheet: Initial Position
Assets
Liabilities and Equity
Investment $60,000
Money borrowed
Equity
Margin% = $25,000/$60,000 = 41.67%
No margin call.

$35,000
$25,000

c) Margin Trading : Margin Call

At what price (p) will you get a margin call?
Solution:
Equity* / Total Investment = Maintenance Margin
or (1000P - $35,000)* / 1000P = 40%
or Price = p = $58.33
* Equity = 1000P - Amount Borrowed.
Any price below $58.33, you will get a margin call.

d) Margin Trading : Additional Equity Requirements

Q. How much cash you need to add to the account if the share
price fell to $50 per share?
Solution:
Balance Sheet: Market price = $50 per share
Assets
Liabilities and Equity
Investment $50,000
Money borrowed $35,000
Equity
$15,000
Margin% = 15,000/50,000 = 30%*
* Margin% below maintenance margin requirement.

Margin Trading: Additional Equity Requirements (Cont.)

Balance Sheet: Market price = $50 per share
Assets
Liabilities and Equity
Investment $50,000
Money borrowed
Cash
$ 10,000
Equity

$35,000
$25,000

Margin% = 25,000/50,000 = 50%

Cash $10,000 needed to make the account current.

e) Margin Trading : Forced Selling

Q. How much shares will be sold (in order to make the
account current) if you do not fulfill additional equity
requirement?
Solution:
Balance Sheet: Market price = $50 per share
Assets
Liabilities and Equity
Investment $3o,000
Money borrowed $35,000
Cash
$ 20,000
Equity
$15,000
Shares will be sold: $20,000/ 50 = 400
Margin% = 15,000/30,000 = 50%

2. Margin Trading : Short Position

a)
b)
c)
d)
e)

Initial Margin
Maintenance Margin
Margin Call
Additional Equity Requirement
Forced Adjustments of the Account

Security Market Regulation

Security and Exchange Commission (SEC)
Dhaka Stock Exchange (DSE)
Chittagong Stock Exchange (CSE)

Goal: Market Efficiency

Listing requirements
Corporate Governance
Settlement
Short Selling
Margin Rules
Mandatory reporting obligations
Insider trading
Market manipulation
Misrepresentation of financial information etc.

Thank You