Scribd
Upload
38 views5 pages

Lecture 05margin&

Uploaded by

Syed Ali Haider
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
38 views5 pages

Lecture 05margin&

Uploaded by

Syed Ali Haider
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 5

Marginal Financing

Buying on Margin
• When investors buy shares they have easy access to a
source of debt, called brokers call loan or buying on
margin
• Broker may have funds, if not, the broker borrows from
financial institutions at badla rate
• Badla or CFS session
• Intra-day trades do not have margin cost
• Greater up-side potential, but also greater downside
risk
Margin Financing
• Margin: the portion of the purchase price contributed
by investor
• Margin requirements: suppose if margin is 50%
• Then investor must provide at least Rs.10000 for
purchasing Rs.20000 worth of shares
• Assume: purchased 200 shares of FFC at Rs.100 each
with Rs.10000 of equity and the rest for debt
• Margin = Equity/Value of stock
10000/20000= .5 or 50%
• What will happen if price of FFC drops to Rs.70
• Initial Margin
An initial margin is the amount of a margin account as a percentage of
the investment purchased on margin.
• Maintenance Margin
The percentage of security’s value that must be in hand as equity
• Actual Margin
AC= CVS-AB/CVS
• Margin Call
A call from the broker for additional equity/cash/securities as a result of
actual margin declining below the maintenance margin.
Margin Financing and Falling prices
of securities
• If FFC price falls to Rs70, loss to the investor will be
(200x30) = 6000. His margin will now be:
• (10000-6000)/(200x70) = 4000/14000 = 28%
• The investor will be asked to deposit Rs.3000 so that
his equity increases and the margin reaches the 50%
mark again i.e (4000+3000)/14000 = 7000/14000 =
50%

You might also like