Buying On Margin

The accompanying spreadsheet can be used to measure the return on investment for buying stocks on margin. The model is set up to allow the holding period to vary. The model also calculates the price at which you would get a margin call based on a specified mainte-

A

B

C

D

E

1

2

Buying on Margin

Ending

Return on

3

St Price

Investment

4

Initial Equity Investment

10,000.00

-42.00%

5

Amount Borrowed

10,000.00

20

-122.00%

6

Initial Stock Price

50.00

25

-102.00%

7

Shares Purchased

400

30

-82.00%

8

Ending Stock Price

40.00

35

-62.00%

9

Cash Dividends During Hold Per.

0.50

40

-42.00%

10

Initial Margin Percentage

50.00%

45

-22.00%

11

Maintenance Margin Percentage

30.00%

50

-2.00%

12

55

18.00%

13

Rate on Margin Loan

8.00%

60

38.00%

14

Holding Period in Months

6

65

58.00%

15

70

78.00%

16

Return on Investment

75

98.00%

17

Capital Gains on Stock

-4,000.00

80

118.00%

18

Dividends

200.00

19

Interest on Margin Loan

400.00

20

Net Income

-4200.00

21

Initial Investment

10,000.00

22

Return on Investment

-42.00%

23

24

Margin Call:

25

Margin Based on Ending Price

37.50%

27

Price When Margin Call Occurs

$35.71

28

29

Return on Stock without Margin

-19.00%

Value of shares owed

which implies that P = $115.38 per share. If IBM stock should rise above $115.38 per share, you will get a margin call, and you will either have to put up additional cash or cover your short position.

CONCEPT CHECK ^ QUESTION 5

If the short position maintenance margin in the preceding example were 40%, how far could the stock price rise before the investor would get a margin call?

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