A margin account is a credit account with a broker that can be used for stock trading. The funds available under the margina loan are determined by the broker on the basis of the securities held and made available by the trader acting as collateral for the loan. As a general rule, the broker has the right to change the percentage of the value of any security that he allows to make towards other advances to the trader and can therefore make a margin call if the available balance falls below the amount actually used. In all cases, the broker usually calculates interest and other fees on the amount deducted from the margin account. Borrowers should have legal advice on margin loan documents (and, most importantly, all related retention and security documents) to ensure that they are familiar with their own obligations, the lender`s rights and the time frames in which marginal appeals must be met, and how long the lender must wait to exercise its rights. With respect to illiquid securities, there is also a risk that the valuation received by the lender will be too low and that the guarantees will actually be acquired by the lender in accordance with the Financial Collateral Regulations (see below). During the term of the loan, it is important that borrowers regularly check their credit account, as the value of the market value of the portfolio could change very quickly, and if the value decreases, the borrower must ensure that he or she will be able, if necessary, to sell the portfolio assets or repay the loan or replenish it with other assets. , taking into account that the time frames within which margin calls must be met can be very short (for example. B 24 hours or less). The initial margin requirement is the amount of guarantees needed to open a position. Then, the necessary security until the position closes is the maintenance requirement.
Maintenance requirements are the minimum amount of security required to keep the position open and are generally below the original requirement. This allows the price to move against the margin without forcing a margin call immediately after the initial transaction. If the total value of the security is covered by the maintenance margin requirement, the facility owner must mortgage additional collateral to restore its overall balance or exceed the initial margin requirement. However, for instruments considered to be particularly risky, regulators, the stock exchange or the broker may set the maintenance burden above normal or equal to the initial risk reduction requirement relative to the risk accepted by the trader. For futures and derivatives clearing accounts, futures traders can calculate a premium or margin multiplier for trading requirements. This is usually an additional 10% to 25%. The terms of the Margin Call provisions and the valuation mechanics of the margina loan contract are the negotiating centre for these transactions. It is essential to agree on the frequency and method of evaluation. Where the underlying portfolio is a number of investments in managed funds, the lender generally expects “haircut mechanisms,” an ability to exclude assets from the collateral pool when the fund manager imposes cash constraints in accordance with the terms of the fund`s documentation.
Suppose the share price drops to $85. The net worth is now only $5 (the previous net worth of $20 minus the $15 share price drop), so to obtain the broker`s minimum margin, Jane must increase that net worth to $10 or more, either by selling the stock or by repaying a portion of the loan.