A margin account lets an investor borrow money to use for trading.
You have $100,000 in an account but want to buy $150,000 worth of shares in Better Win Inc. You can use margin to make up the additional $50,000.
Margin works like a loan. You pay interest on the amount you borrow. The stock purchased in the transaction becomes the collateral. If needed, your brokerage firm (the party loaning you the margin money) will make a margin call...they'll force you to sell the stock in order to pay back the loan if the transaction starts to go bad.
There are rules controlling margin transactions. Maintenance margin represents one of those guidelines. The Federal Reserve, one of the key U.S. financial regulators, has what's called Regulation T, dictating the requirements related to margin transactions.
The maintenance margin part states that you have to hold a minimum amount in an account involved in margin trading. The Fed requires 25%, but individual companies might set their barrier above that level.
The situation comes into play if the stock you purchase goes down in value. You buy $150,000 worth of Better Win Inc. at $15 a share (meaning you buy 10,000 shares). Pretty soon it falls to $10...your holdings drop from $150,000 to $100,000. Remember: you borrowed $50,000 to make the purchase. Your equity in the holdings is now just 50%. You hold $50,000 worth, and $50,000 worth is earmarked for a potential margin call. The stock falls again, this time to $6.60. Your holdings are now worth $66,000. You owe $50,000 and have $16,000 in equity; your equity represents about 24% of the total value of the holdings in your account, below the 25% barrier. Your broker makes a margin call. They liquidate your stock, take their $50,000 (plus whatever interest you owe) and leave you whatever little is left.
So. Much. Winning.
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Finance: What is Balloon Interest, or a ...197 Views
Finance a la shmoop what is balloon interest or a balloon payment. All right
people you blow and blow and blow and blow and then one day it pops. Well [Balloon with loan written on it explodes]
that's kind of what a balloon loan looks like in most cases common loans are paid [House with a sold sign]
down as they go like a home mortgage on you know your brand-new home there
Well it starts out as 400 grand payable over 30 years and then little by little
grinding away year after year after year the loan is paid down and the final [Years going by and the principal remaining reducing]
payment is like well just a few grand and you're the proud owner of a 30-year
old shack it's become one after 30 years... Well were this a balloon payment style [Picture of a wooden old house]
of loan well you might have just paid interest on that four hundred grand for
twenty nine point nine years and then that last payment would be the four
hundred grand principle you'd borrowed. Huge or as a famous real estate man once
said huge, that could be one month's interest on the four hundred grand plus [Donald Trump appears]
four hundred grand well that last balloon payment will have
popped when you've paid off your house. Well the same structure of debt lives in [Guy pops the balloon with a pin]
the world of zero coupon bonds and t-bills as well where you as an investor
buy a notional par value of say a grand, at a discount meaning you're buying that
thousand dollars at a discount... meaning you pay six hundred forty-two
bucks for a payment of a thousand dollars in six years with no payments of
interest or pay down of principal in between. That final loan payoff is the [Hot air balloons in the background]
balloon oh happy day and it isn't even your birthday [Guy in a suit dancing with balloons and confetti falling]
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