Margin Requirements and Maintenance Margin
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Can you please sxplain how margin requirements can affect the potential return and risk from investing in a stock. What is the maintenance margin?
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This solution explains margin requirements and maintenance margin.
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When an investor buys a stock by borrowing some part of the purchase price, the investor has "traded on margin." This margin is a debt collateralized by the stock purchased using it. As with any debt, if the value of the collateral (i.e., the price of the stock) drops below a certain threshold, the lender can require that the borrower either pay down the loan or increase the amount of collateral posted; this is called a "margin call." Thus, the most pressing risk to the investor using margin is that the price of the stock will drop, ...
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