It is definitely BAD news if I had received a MARGIN call from my broker in the last 2 weeks.
What is a margin call?
Situation arises when I have borrowed money from stockbroking firm to partially pay for my share purchases AND the share price of that counter fell significantly.
Example
I have purchased 100 lots (ie. 100,000 shares) of Company X at $1 per share. At 80% financing, I paid $20,000 from my own pocket and the remaining $80,000 borrowed from the firm.
When the share price dropped to 70 cents, the firm would recalculate the loan amount ie. 80% of 70 cents x 100,000 shares = $56,000.
The firm would call me to top up the difference of $24,000 (ie. $80,000 less $56,000)!
If I got the money, I would pay the $24,000.
If I got no money, I would be forced to sell my shares at a loss of $30,000!!!
Moral of the story - You must consider the downside for any upside that you are expecting.
What is a margin call?
Situation arises when I have borrowed money from stockbroking firm to partially pay for my share purchases AND the share price of that counter fell significantly.
Example
I have purchased 100 lots (ie. 100,000 shares) of Company X at $1 per share. At 80% financing, I paid $20,000 from my own pocket and the remaining $80,000 borrowed from the firm.
When the share price dropped to 70 cents, the firm would recalculate the loan amount ie. 80% of 70 cents x 100,000 shares = $56,000.
The firm would call me to top up the difference of $24,000 (ie. $80,000 less $56,000)!
If I got the money, I would pay the $24,000.
If I got no money, I would be forced to sell my shares at a loss of $30,000!!!
Moral of the story - You must consider the downside for any upside that you are expecting.
2 comments:
Hi Edgar, why is the loan tied to the price of the share?
Hi,
The shares are the collateral to secure the loan.
The lender wants to ensure that there is enough sales proceeds from selling the shares, to pay the outstanding loan.
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