Many Series 7 candidates struggle with the initial credit created in a short margin account. The way to check your work--if you get such a test question--is to make sure that whatever the amount of the stock, the margin customer's initial credit is "half again as much." If he sells $40,000 short, his initial credit is $60,000. If he sells $100,000 of stock short, his initial credit is $150,000.
Why?
Because Reg T is 50%. He receives the cash for the sale of securities, plus he deposits half that amount in cash, and ends up with "half again as much." So, the following question should be fairly easy:
A customer sells 1,000 shares of ABC common stock short @45. Therefore, his initial credit in the short margin account is:
A. $45,000
B. $67,500
C. $50,000
D. $90,000
EXPLANATION: again, the short seller receives the proceeds of $45,000, plus he deposits half that amount ($22,500) to meet the Reg T requirement. Add those two numbers together, and you see that the answer is . . . .
b.
Showing posts with label margin question. Show all posts
Showing posts with label margin question. Show all posts
Tuesday, May 18, 2010
Thursday, February 4, 2010
Margin Question
Margin questions are always fun, so let's enjoy one right now, shall we?
A customer of a broker-dealer purchases $30,000 of XYZ in a new margin account. The margin requirement is 60%; therefore, the required equity initially is
A. $18,000
B. $15,000
C. $12,000
D. $2,000
EXPLANATION: if the question says the intial margin requirement is above 50%, you have to accept that fact and work with it. If margin is what the customer has to deposit, he has to deposit $18,000. Which makes the initial equity $18,000.
ANSWER: a
Also, for anyone who remembers back when I was willing to discuss the stupid loan I took from "SMA" in my own margin account, the debit balance is now $4,700 with the little interest charges adding up each month. The 90 shares of Hospira that I plan to sell to pay off the debit is worth about $4,500, after advancing 17%. Back when I started blogging about my adventures in margin, Hospira was in negative territory. Unfortunately, as it slowly rises in value, it never seems to quite catch up to the interest charged on the loan. Even if/when it rises above what I owe, it will still be an idiotic maneuver. I'll end up selling a stock that would otherwise pay me dividends for decades and probably end up worth three times what I bought it for when/if I reach retirement age. Oh well. I needed the cash at that point, and I was willing to sacrifice good judgment for the sake of my Series 7 customers, who deserve to see at least a few testable points played out in the real world.
A customer of a broker-dealer purchases $30,000 of XYZ in a new margin account. The margin requirement is 60%; therefore, the required equity initially is
A. $18,000
B. $15,000
C. $12,000
D. $2,000
EXPLANATION: if the question says the intial margin requirement is above 50%, you have to accept that fact and work with it. If margin is what the customer has to deposit, he has to deposit $18,000. Which makes the initial equity $18,000.
ANSWER: a
Also, for anyone who remembers back when I was willing to discuss the stupid loan I took from "SMA" in my own margin account, the debit balance is now $4,700 with the little interest charges adding up each month. The 90 shares of Hospira that I plan to sell to pay off the debit is worth about $4,500, after advancing 17%. Back when I started blogging about my adventures in margin, Hospira was in negative territory. Unfortunately, as it slowly rises in value, it never seems to quite catch up to the interest charged on the loan. Even if/when it rises above what I owe, it will still be an idiotic maneuver. I'll end up selling a stock that would otherwise pay me dividends for decades and probably end up worth three times what I bought it for when/if I reach retirement age. Oh well. I needed the cash at that point, and I was willing to sacrifice good judgment for the sake of my Series 7 customers, who deserve to see at least a few testable points played out in the real world.
Tuesday, October 6, 2009
Margin Question on Combined Equity
Let's enjoy a fun question on margin accounts:
One of your investors has both long and short stock positions in her margin account. Today, if the value of the long positions increases by $4,000 and the value of her short positions increases by $2,000, the combined equity will
A. increase by $6,000
B. increase by $2,000
C. decrease by $2,000
D. decrease by $6,000
EXPLANATION: remember that you want the value of a short position to drop. It’s nice that the long position advanced $4,000, but that was reduced by the $2,000 advance in the short position’s value
ANSWER: B
One of your investors has both long and short stock positions in her margin account. Today, if the value of the long positions increases by $4,000 and the value of her short positions increases by $2,000, the combined equity will
A. increase by $6,000
B. increase by $2,000
C. decrease by $2,000
D. decrease by $6,000
EXPLANATION: remember that you want the value of a short position to drop. It’s nice that the long position advanced $4,000, but that was reduced by the $2,000 advance in the short position’s value
ANSWER: B
Saturday, June 27, 2009
One More on Margin
A good way to dig into the concepts behind "margin accounts" is to download the margin handbook at an online broker-dealer. After reading TD Ameritrade's Margin Handbook, I felt as if I could go on and on for hours about the topic . . . if I could get anyone to, you know, listen.
Or, you might just want to slog through annoying practice questions, like this:
If your investor sells 1,000 ABC short @37, makes the required Reg T deposit, and then sees that ABC is trading for $18, what is true of the equity in the account?
A. the equity is unchanged
B. the equity is below the minimum maintenance requirement
C. the equity has decreased by $19,000
D. the equity in the account is $37,500
EXPLANATION: whenever someone sells stock short, he wants the stock price to drop. Since ABC does drop, you know that A and B can't be right. The equity has certainly changed even if you aren't sure how. And, since the stock went the correct direction, the equity is improved not "below the minimum maintenance requirement." Do this type of work before you start calculating--knock things off your plate as soon as possible. Now, really, you could eliminate "C," since the equity has increased, and then to check your work do this . . . add the $37,000 the investor receives on the sale plus 1/2 that amount ($18,500), which is the cash he puts down. His Credit - $55,500. Just subtract the current market value of $18,000 from that, and you get the correct answer of $37,500. The opening credit on a short sale is "half again as much" as the short sale. Subtract the market value of the stock from that, and you've figured the "investor's" equity.
ANSWER: D
Or, you might just want to slog through annoying practice questions, like this:
If your investor sells 1,000 ABC short @37, makes the required Reg T deposit, and then sees that ABC is trading for $18, what is true of the equity in the account?
A. the equity is unchanged
B. the equity is below the minimum maintenance requirement
C. the equity has decreased by $19,000
D. the equity in the account is $37,500
EXPLANATION: whenever someone sells stock short, he wants the stock price to drop. Since ABC does drop, you know that A and B can't be right. The equity has certainly changed even if you aren't sure how. And, since the stock went the correct direction, the equity is improved not "below the minimum maintenance requirement." Do this type of work before you start calculating--knock things off your plate as soon as possible. Now, really, you could eliminate "C," since the equity has increased, and then to check your work do this . . . add the $37,000 the investor receives on the sale plus 1/2 that amount ($18,500), which is the cash he puts down. His Credit - $55,500. Just subtract the current market value of $18,000 from that, and you get the correct answer of $37,500. The opening credit on a short sale is "half again as much" as the short sale. Subtract the market value of the stock from that, and you've figured the "investor's" equity.
ANSWER: D
Wednesday, June 17, 2009
Margin Question
Let's enjoy a challenging practice question on margin accounts:
A customer in a new margin account purchases 100 XYZ @38 and makes the required Reg T deposit. If XYZ rises to $52 a share, the equity in this long margin account will be
A. $3,300
B. $3,400
C. $3,200
D. $1,400
EXPLANATION: this is a very tough question. First, if you simply take 1/2 of $3,800, you will get the question wrong. But, if you're lucky enough to remember that the minimum maintenance is $2,000, you could easily mess up by writing $2,000 as the Debit Balance. Remember that if the customer deposits $2,000 on a $3,800 position, the Debit Balance is only $1,800. So, when the stock rises to $5,200, the equity is the difference of $3,400.
ANSWER: B
A customer in a new margin account purchases 100 XYZ @38 and makes the required Reg T deposit. If XYZ rises to $52 a share, the equity in this long margin account will be
A. $3,300
B. $3,400
C. $3,200
D. $1,400
EXPLANATION: this is a very tough question. First, if you simply take 1/2 of $3,800, you will get the question wrong. But, if you're lucky enough to remember that the minimum maintenance is $2,000, you could easily mess up by writing $2,000 as the Debit Balance. Remember that if the customer deposits $2,000 on a $3,800 position, the Debit Balance is only $1,800. So, when the stock rises to $5,200, the equity is the difference of $3,400.
ANSWER: B
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