Margin Calls and Stop Outs are part of the Risk Management strategies or way of Trade12 and was implemented to limit further losses and to decrease the risk of a negative account balance.

1. • Using only a portion of the proceeds for an
investment
• Borrow remaining component
• Margin arrangements differ for stocks and
futures
Margin Trading
Example
with Trade12

2. • Greatest margin
– Currently 30%
– Set by the securities commissions
• Minimum margin
– Minimum level the equity margin can be
(called “maintenance” in USA)
• Margin call
– Call for more equity funds
Stock Margin Trading

3. X Corp $70
50% Initial Margin
30% Minimum Margin
1000 Shares Purchased
Initial Position
Stock $70,000 Borrowed $35,000
Equity $35,000
Margin Trading - Initial Conditions

4. Margin Trading - Minimum
Margin
Stock price falls to $60 per share
New Position
Stock $60,000 Borrowed $35,000
Equity $25,000
Margin% = $25,000/$60,000 = 41.67%

5. Margin Trading - Margin Call
• How far can the stock price fall before a
margin call?
Therefore, P = $50
Note: 1,000xP – Amount Borrowed = Equity
%30
P000,1
000,35$P000,1
=
×
−×

6. Leveraging effect of margin
purchases
• 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%
• A 30% drop in the price, though, brings a
negative rate of return of -69%.

7. Short Sales
• Purpose: to profit from a decline in the price
of a stock or security
Mechanics
• Borrow stock through a dealer
• Sell it and deposit proceeds and margin in an
account
• Close out the position: buy the stock and
return it to the owner

8. Short Sale - Initial Conditions
Z Corp 100 Shares
50% Initial Margin
30% Minimum Margin
$100 Initial Price
Sale Proceeds $10,000
Margin & Equity $ 5,000
Stock Owed $10,000

9. Short Sale - Minimum Margin
Stock Price Rises to $110
Sale Proceeds $10,000
Initial Margin $ 5,000
Stock Owed $11,000
Net Equity $ 4,000
Margin % (4,000/11,000) = 36%

10. Short Sale - Margin Call
• How much can the stock price rise before a margin
call?
So, P = $115.38
Note: $15,000 = Initial margin + sale proceeds
$15,000 $100
30%
100
P
P
−
=