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Margin Trading: Borrowing, the Price of Stock, Profit

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Suppose you are bullish on Stock X and instruct your broker to buy 1,000 shares on margin, with a margin of 60%. The current price of a share of Stock X is $30, the interest on loans is 5%, and the maintenance margin is 40%.

a) How much do you borrow from your broker?

b) How far can the stock price fall before a margin call?

c) If the price falls to $15 and your broker issues a margin call. What can you do to solve this problem?

d) If the price of the stock rises to $35 (falls to $25) after one year and you decide to sell, how much is your profit? How much is your rate of return?

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Answers questions on margin trading.

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Please see attached file

a) How much do you borrow from your broker?

Margin purchases:

"In a margin purchase, the portion of the value of an investment that is not borrowed is called the margin.
"

Actual margin =Equity / Market Value = (Market Value - Loan) / Market Value

Data
Share price= $30.00
Number of shares= 1,000
Margin= 60%
Interest cost = 5%
Time= 1 year
Margin call at =Maintenance margin= 40%

At commencement:
Amount required for the purchase= $30,000 =1000 x $30.
Amount provided by the investor= $18,000 =60.% x $1,000.
Amount provided by the broker (loan)= $12,000 =$30,000. - $18,000.

Asssets
Stock $30,000

Liabilities and Shareholders' ...

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