You have an individual brokerage account consisting of margin-eligible equities and fixed income securities with a total value of $275,000. You applied and got approved for using margin.
Based on a review of your account holdings, you're initially eligible to borrow up to 50% of your balance – so $137,500. You decide to take a $50,000 loan which will have an effective rate of 7.875% (based on margin interest rates as of June 15, 2018). This loan value is much lower than your maximum allowable amount, but one you're comfortable with.
Taking this example even further, it's important to know how much of a decline your account holdings can withstand before going into a margin call.
|
Security requirement
First, assume the security requirements in your account are 40% or $110,000.
|
|
Market value of securities |
$275,000 |
| Security requirement % |
x 40% |
| Security requirement $ |
$110,000 |
|
House surplus
Next, subtract the security requirement and the amount of your margin loan from your equity to get the house surplus in your account.
|
|
Market value of securities |
$275,000 |
| Your margin loan |
−$50,000 |
| Security requirement |
−$110,000 |
| House surplus |
$115,000 |
Maximum decline before a margin call
Then, take the $115,000 house surplus and divide it by .6 which is the inverse of your security requirement. If your equity falls below the minimum requirement, you’d be subject to a margin call. This means your account can withstand just over a $191,000 depreciation before you are issued a margin call. |
|
House surplus |
$115,000 |
| Inverse of security requirement |
/ 60% |
| Maximum depreciation before a margin call |
$191,667 |
Learn more about ways to avoid and manage margin calls
