Using a Margin Calculator
In the investment world, there are two ways to purchase stocks--you can either buy the stocks with your own money from your investment account or you can use money from your margin account. A margin account is basically a loan that your brokerage firm extends to you to purchase stock. Ultimately, you pay a portion of the purchase price of a stock and the brokerage firm lends you the rest. Your stocks then become the collateral for the loan. Margin can be calculated by using the following formula: M = 100 x (V-L)/V, where M is the margin, V is the market value of the stocks and L is the broker's loan.
The lowest initial margin in your account when you purchase the stocks is set at 50 percent by the Federal Reserve Board. After you purchase the stock using your margin account the New York Stock Exchange has set the maintenance margin of 25 percent (some brokerage firms have the margin set at 30 percent). If your account falls below this minimum margin, the broker issues a margin call, after which you are expected to send additional monies to your broker and if you do not comply, the firm will sell your stocks immediately. Many investors buy stocks on margin, as it gives them additional buying power. In a strong market it is very beneficial but the opposite can happen in a down market. The good news is that, you can stay ahead of the markets fluctuations by using a margin calculator. The calculator can be used to perform different tasks to make margin trading more predictable.
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Instructions
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Calculate your potential gain or loss from the fluctuations in stock prices depending on the amount of money you borrowed in your margin account by using a margin calculator.
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Use the calculator to compute the dollar amount of interest that you will pay over the life of your margin loan.
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Determine the number of shares you can purchase of a certain stock by inputting the variables into the calculator.
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Estimate how many shares you need to sell to meet a margin call before it is issued.
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Estimate the cost of trading using funds from your margin account.
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Estimate the chances based on past data, that you will receive a margin call in the near future.
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Tips & Warnings
Margin trading can leave you owing more than you deposited into your investment accounts. Margin trading is very risky, don't do it unless you fully understand what you are doing, and are prepared for the consequences of a margin call. Read your margin account agreement carefully, as it contains the terms and conditions of repaying you loan. The agreement should also contain the conditions that the firm will give you when there is a margin call. Be aware of the fact that you may not be entitled to a time extension once you have a margin call. You will not be able to decide which securities will be sold after a margin call.
