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Example: Securities Margin Calculations

 

The following table shows an example of a typical sequence of trading events involving securities and how they affect a Regulation T (Reg T) Margin Account.[1]

 
Day 1: Deposit $10,000.00 Cash in Margin Account.
After the deposit, account values look like this:
Cash = $10,000.00  
Securities Market Value = $0.00 No positions held
Equity with Loan Value (ELV) = $10,000.00 Total cash value + stock value + bond value + fund value + European & Asian options value
PT Initial Margin = $0.00 IM = 25% * Stock Value
Maintenance Margin (MM) = $0.00 MM = 25% * Stock Value
Available Funds = $10,000.00 ELV - IM
Excess Liquidity $10,000.00 ELV - MM
 
Day 1: End of Day SMA Calculation
Reg T Margin = $0.00 Reg T Margin = 50% * Stock Value
SMA = $10,000.00 (Prior Day SMA +/- Change in Day's Cash
+/- Today's Trades Reg T Initial Margin)
or
(Equity with Loan Value - Reg T Margin)
whichever is greater
SMA >= 0 SMA Requirement Satisfied, NO liquidation
 

Day 2: Customer BUYS 500 shares of XYZ stock at $40.00/share. Total Amount = $20,000.00. After the trade, account values look like this:

Cash = ($10,000.00)  
Securities Market Value = $20,000.00  
Equity with Loan Value = $10,000.00  
PT Initial Margin = $5,000.00 IM = 25% * Stock Value
Maintenance Margin = $5,000.00 MM = 25% * Stock Value
Available Funds = $5,000.00

ELV - IM       Available Funds were >=0 at the time of the trade, so the trade was submitted.

Excess Liquidity $5,000.00 ELV - MM
 
Day 2: End of Day SMA Calculation
Reg T Margin = $10,000.00 Reg T Margin = 50% * Stock Value
SMA = $0.00 ($10,000.00 – $0.00 – $10,000.00)
 or
 ($10,000.00 – $10,000.00)
 Whichever is greater
SMA > = 0   SMA Requirement Satisfied, NO liquidation
 
Day 3: First, the price of XYZ rises to 45.00/share. Account values now look like this:
Cash = ($10,000.00)  
Securities Market Value = $22,500.00  
Equity with Loan Value = $12,500.00  
PT Initial Margin = $5,625.00 IM = 25% * Stock Value
Maintenance Margin = $5,625.00 MM = 25% * Stock Value
Available Funds = $6,875.00 ELV - IM
Excess Liquidity $6,875.00 ELV - MM
Excess Liquidity >= 0, so NO LIQUIDATION occurs.
 
Day 3: Then the price of XYZ falls to $35.00/share. Account values now look like this:
Cash = ($10,000.00)  
Securities Market Value = $17,500.00  
Equity with Loan Value = $7,500.00  
PT Initial Margin = $4,375.00 IM = 25% * Stock Value
Maintenance Margin = $4,375.00 MM = 25% * Stock Value
Available Funds = $3,125.00 ELV - IM
Excess Liquidity $3,125.00 ELV - MM
 
Day 3: End of Day SMA Calculation
Reg T Margin = $8,750.00 Reg T Margin = 50% * Stock Value
SMA = $0.00 ($0.00 +/– $0.00 + $0.00)
or
($7,500.00 – $8,750.00)
Whichever is greater
SMA > = 0  SMA Requirement Satisfied, NO liquidation
 
Day 4: Customer SELLS 500 shares of XYZ at $45.00/share. Total Amount = $22,500.00. After the trade, account values look like this:
Cash = $12,500.00  
Securities Market Value = $0.00 Positions no longer held.
Equity with Loan Value = $12,500.00  
PT Initial Margin = $0.00 IM = 25% * Stock Value
Maintenance Margin = $0.00 MM = 25% * Stock Value
Available Funds = $12,500.00 ELV - IM
Excess Liquidity $12,500.00 ELV - MM
 
Day 4: End of Day SMA Calculation
Reg T Margin = $0.00 Reg T Margin = 50% * Stock Value
SMA = $12,500.00 ($0.00 +/– $0.00 + $11,250.00)
or
($12,500.00 – $0.00)
Whichever is greater
SMA > = 0  SMA Requirement Satisfied, NO liquidation
 
Day 5: Customer attempts to BUY 500 shares of ABC stock at $101.00/share. Total Amount = $50,500.00. Account values at the time of the attempted trade would look like this:
Cash = $12,500.00  
Securities Market Value = $0.00  
Equity with Loan Value = $12,500.00  
PT Initial Margin = $12,625.00 IM = 25% * Stock Value
Maintenance Margin = $12,625.00 MM = 25% * Stock Value
Available Funds = ($125.00) ELV-  IM
Excess Liquidity ($125.00) ELV - MM
Available Funds < = 0, so the trade is Rejected.
 
Day 5: Later on Day 5, the customer buys some stock. 
Customer BUYS 300 shares of ABC stock at $100.00/share. Total Amount = $30,000.00. After the trade, account values look like this:
Cash = ($17,500.00)  
Securities Market Value = $30,000.00  
Equity with Loan Value = $12,500.00  
PT Initial Margin = $7,500.00 IM = 25% * Stock Value
Maintenance Margin = $7,500.00 MM = 25% * Stock Value
Available Funds = $5,000.00 ELV - IM
Excess Liquidity $5,000.00 ELV - MM
 
Day 5: End of Day SMA Calculation
Reg T Margin = $15,000.00 Reg T Margin = 50% * Stock Value
SMA = -$2,500.00 ($12,500 +/– $0.00 – $15,000.00)
or
($12,500.00 – $15,000.00)
Whichever is greater
SMA = ($2,500.00) which is < 0 Shares are Liquidated.
 
Day 5: Consider an alternate Day 5 scenario in which the price of ABC stock drops. 
Price of ABC stock drops to $75.00/share. Account values would now look like this:
Cash = ($17,500.00)  
Securities Market Value = $22,500.00  
Equity with Loan Value = $5,000.00  
PT Initial Margin = $5,625.00 IM = 25% * Stock Value
Maintenance Margin = $5,625.00 MM = 25% * Stock Value
Available Funds = ($625.00) ELV - IM
Excess Liquidity ($625.00) ELV - MM
Excess Liquidity < 0, so shares will be Liquidated.
 
  1. The example uses Initial and Maintenance Margins of 25%. These percentages are used for illustrative purposes only and do not necessarily reflect current Interactive Brokers margin rates.
  2. Using a margin requirement of 25%, the account would become subject to liquidation at a price of (Cash Borrowed / # of Shares) / (1 – margin rate). Using the values in the above example, the account would become subject to liquidation when the price falls to (10,000 / 2,000) / (1 - .25), or $6.6667.
 

 

 

  

Example:  How to Determine the Last Stock Price Before We Begin to Liquidate Positions

 

For example, suppose a customer buys 2,000 shares of ABC stock at $10.00/share on margin. The loan amount in this case is $10,000.00, so the calculations would be: (1)

 
1. Customer deposits $10,000 in Reg T Margin account.
Cash = $10,000.00  
Securities Market Value = $0.00  
Equity with Loan Value = $10,000.00  
Maintenance Margin = $0.00 MM = 25% * Stock Value
Excess Liquidity $10,000.00 ELV - MM
 
2. Customer buys $20,000.00 of ABC stock (2,000 shares at $10.00/share)
Cash = ($10,000.00)  
Securities Market Value = $20,000.00  
Equity with Loan Value = $10,000.00  
Maintenance Margin = $5,000.00 MM = 25% * Stock Value
Excess Liquidity $5,000.00 ELV - MM
 
3. The price of ABC begins to drop.
Determine the last stock price of ABC before we begin to liquidate the position:
Cash = ($10,000.00)  
Securities Market Value = $13,333.33  
Equity with Loan Value = $3,333.33  
Maintenance Margin = $3,333.33 MM = 25% * Stock Value
Excess Liquidity = $0.00 ELV - MM
Price = ($10,000 / 2,000) / (.75) = $6.6667(2)
 
  1. The example uses Initial and Maintenance Margins of 25%. These percentages are used for illustrative purposes only and do not necessarily reflect current Interactive Brokers margin rates.
  2. Using a margin requirement of 25%, the account would become subject to liquidation at a price of (Cash Borrowed / # of Shares) / (1 – margin rate). Using the values in the above example, the account would become subject to liquidation when the price falls to (10,000 / 2,000) / (1 - .25), or $6.6667.
 
 
 

Example:  How Much Stock Do We Liquidate?

 

In the following example, a customer buys stock, but then the price of the stock drops enough to bring the Excess Liquidity balance below zero, prompting liquidation.

 
1. Customer deposits $10,000 in Reg T Margin account.
Cash =  $10,000.00  
Securities Market Value =  $0.00  
Equity with Loan Value (ELV) =  $10,000.00  
Maintenance Margin (MM) =  $0.00 MM = 25% * Stock Value
Excess Liquidity  $10,000.00 ELV - MM
 
2. Customer buys $20,000.00 of ABC stock (2,000 shares at $10.00/share)
Cash =  ($10,000.00)  
Securities Market Value =  $20,000.00  
Equity with Loan Value =  $10,000.00  
Maintenance Margin =  $5,000.00 MM = 25% * Stock Value
Excess Liquidity  $5,000.00 ELV - MM
 
3. The price of ABC drops to $6.00/share
Cash =  ($10,000.00)  
Securities Market Value =  $12,000.00  
Equity with Loan Value =  $2,000.00  
Maintenance Margin =  $3,000.00 MM = 25% * Stock Value
Excess Liquidity  -$1,000.00 ELV - MM
Excess Liquidity is now < 0, so positions will be liquidated to bring Excess Liquidity back to at least zero.
 
4. Determine the liquidation amount using the calculation listed above:
Liquidation Amount  = $1,000.00 * 4
   = $4,000.00
 
5. After liquidation, the customer's account balances look like this:
Cash =  ($6,000.00) Original $10,000.00 loan – Liquidation Amount
Securities Market Value =  $8,000.00 $12,000.00 Market Value – Liquidation Amount
Equity with Loan Value =  $2,000.00  
Maintenance Margin =  $2,000.00 MM = 25% * Stock Value
Excess Liquidity  $0.00 ELV - MM

Please note that this ONLY brings the Excess Liquidity balance back to zero. Depositing more than this amount will provide the ability to open additional positions and/or a cushion to prevent further liquidation.

 
  1. The example uses Initial and Maintenance Margins of 25%. These percentages are used for illustrative purposes only and do not necessarily reflect current Interactive Brokers margin rates.
  2. Using a margin requirement of 25%, the account would become subject to liquidation at a price of (Cash Borrowed / # of Shares) / (1 – margin rate). Using the values in the above example, the account would become subject to liquidation when the price falls to (10,000 / 2,000) / (1 - .25), or $6.6667.

  

 

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