Buyingonmargin

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Buyingonmargin

  1. 1. STOCK MARKETTopic : Buying on margin Group 14 : Nguyễn Tường Linh Nguyễn Anh Phương Nguyễn Thu Hường Bùi Thị Thúy Hằng An Đinh Tú Quyên
  2. 2. Content: Definition. Margin requirements. Stock margin trading. Exercises. 2
  3. 3. Definition: what is buying on margin? The investor borrows part of the purchase price of the stock from a broker.Margin: portion of purchase pricecontributed by the investor. 3
  4. 4. Definition: what is buying on margin? Investments with borrowing.  Borrowing cash: buying on margin  Borrowing shares of stock: short sales. 4
  5. 5. Margin requirementLimiting the proportion of funds that may• - Imposed by the Federal Reversebe borrowed from the brokerage firm to• - Representing the minimum proportionmake the investment.of funds that must be covered with cash.Currently, at least 50% of investor’sinvested funds must be paid in cash. 5
  6. 6. BUYING ON MARGIN PROCESS Establishing an account ( called margin account) Depositing cash( initial margin: must be at least 50% of the total investment) Maintaining the minimum proportion of equity 6
  7. 7. STOCK MARGIN TRADING Using only a portion of the proceeds for an investment Borrow remaining component Margin:  The net worth (Equity) of the investor’s account  Margin =Asset-Liability ( borrowed funds or stocks)  % Margin=Equity/Value of stock
  8. 8. STOCK MARGIN TRADING Maximum margin is currently 50%; you can borrow up to 50% of the stock value. (Set by the Fed) Minimum margin is:  Minimum level of the equity margin.  Currently 30%, set by the securities commissions. 8
  9. 9. STOCK MARGIN TRADING Maintenance margin: minimum amount equity in trading can be before additional funds must be put into the account. Minimum maintenance margin of New York Stock Exchange ( NYSE) and Nasdaq : 25 %. In Viet Nam, minimum maintenance margin is up to the broker but not less than 40 % 9
  10. 10. STOCK MARGIN TRADING Margin call: notification from broker you must put up additional funds. 10
  11. 11. MARGIN TRADING – INITIAL CONDITIONSIBM price $100# of shares purchased 100Total stock value $10,000Loan from broker $4,000 Assets Liabilities and owner’s equity Stock $10,000 Loan from broker $4,000 Equity $6,000 Margin = Equity/Stock = 6,000/10,000 = 60% 11
  12. 12. MARGIN TRADING – MAINTENANCE MARGINIBM price $100# of shares purchased 100Total stock value $10,000 $70Loan from broker $4,000 $7,000 Assets Liabilities and owner’s equity Stock $10,000 $7,000 Loan from broker $4,000 Equity $6,000 $3,000 Margin = 3,000/7,000 = 43% < 50% = Maintenance Margin Broker issues a Margin Call! 12
  13. 13. MARGIN TRADING - MARGIN CALLHow far can the stock price fall before a margin call?IBM price P# of shares purchased 100Total stock value 100PLoan from broker $4,000 Assets Liabilities and owner’s equity Stock 100P Loan from broker $4,000 Equity 100P-$4,000Margin = (100P-$4,000)/(100P) = 50% P=80 13
  14. 14. WHY BUY SECURITIES ON MARGIN? Wishto invest more than what your money would allow.  Greater upside potential  Greater downside risk 14
  15. 15. IMPACT ON RETURNS R = (SP- INV – LOAN + D ) / INVWhere: SP = selling price of stock INV = initial investment by investor, not including borrowed funds LOAN= loan payments on borrowed funds, including both principal and interest D = dividend payments15
  16. 16. WHY BUY ON MARGIN? EXAMPLEIBM price $100# of shares purchased 100Total stock value $10,000Loan from broker $4,000 (interest rate: 10%) End-of-Year Repayment of Rate of return Change in Rate of Value of Principal and (if not buying stock price return shares interest on margin) 30% $13,000 $4,400 43% 30% increase No change $10,000 $4,400 -6.7% 0% 30% $7,000 $4,400 -57% -30% decrease 16
  17. 17. LEVERAGING EFFECT OF MARGIN TRADE You buy 200 shares of XYZ at $100, expecting a 30% appreciation of the stock in one year:  Initial margin: 50%  Financed by a 9% loan for one year  Expected net return: 51% = (30%x2-9%) A 30% drop in the price, though, results in -69%( -30%x2-9%) return.17
  18. 18. EXAMPLE AND EXERCISE 1: MARGIN TRADINGYou bought on margin one share of ABC at $70, paying $35 of your own money.The minimum margin is set at 30%.A. Initial position.Stock $70 Borrowing = ? $35 Equity = ? $35B. New Position: Stock price=$40Stock $40 Borrowing =? $35 Equity = ? $5Margin= $5/$40 = 12.5% 18
  19. 19. EXAMPLE AND EXERCISE 1: MARGIN TRADINGMargin call Investor is required to put up $7 to bring up the margin to $12 ($5+7), or 30% ($12/40) of current value of stock. How far can the stock price fall before a margin call? (1xP - $1x35)/1xP = 30% P=$5019
  20. 20. EXAMPLE AND EXERCISE 2: MARGIN TRADINGX Corp $7050% Initial Margin40% Maintenance Margin1000 Shares PurchasedInitial PositionStock $70,000 Borrowed $35,000 Equity 35,000
  21. 21. EXAMPLE AND EXERCISE 1: MARGIN TRADINGHow far can the stock price fall before amargin call?(1000P - $35,000)x / 1000P = 40%P = $58.33
  22. 22. Busi 580 - Investments 22

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