margin purchases and short sales

long position

• gains when asset value increases

short position

• gains when asset value decreases

financial leverage

• borrow part of the purchase price

• post less than the asset value with futures

buying on margin

• investor borrows part of the purchase price of the stock

equity

• portion of the purchase price contributed by the investor

• remainder borrowed by the broker

margin loan limits

• regulated by board of governors of the federal reserve system (regulation T)

initial margin requirement

• minimum equity percentage at time of purchase

• equity = value of security - borrowing

• set by fed reserve under regulation t

  • currently 50% for stock

maintenance margin requirement

• minimum equity percentage after purchase

• exchanged mandate 25%

margin call

• notification that you must put up additional funds or have the position liquidated

• if equity rises, maintenance margin rises

leverage ratio

• indicates the degree of borrowing while trading on margin