X hits on this document

691 views

0 shares

0 downloads

0 comments

154 / 367

140

CHAPTER 8

a total of $300,000 of XYZ common stock. You invest your $200,000 and you purchase the remaining $100,000 on margin. The maximum margin amount for this example would be $200,000, making the total investment amount $400,000.) You now owe the brokerage house $100,000. They can, and will, charge you some form of interest on that balance. Make sure that if you do trade on margin, you know what kind of interest rates and payments are applicable.

After the initial purchase, you own $300,000 worth of XYZ com- mon. Now, assuming the market goes up, your share increases, not the part you bought on margin. If the price doubles, your shares would be worth $600,000. Of that $600,000, your portion is worth $500,000. You still owe the house $100,000. At this point, you could sell $100,000 worth of stock, plus whatever amount was needed to satisfy the interest owed on the loan, and pay back your loan to the brokerage house to clear up your debt. Then, your portion would con- tinue to go up and down with the market.

Your share

= $200,000

Margin purchase (loan)

= $100,000

Total investment

= $300,000

Market price doubles; account value = $600,000

Your share

= $500,000

Sounds great, right? Now let’s assume that the market goes down instead of up. Rather than your investment doubling in price, it’s now worth only 40 percent of what you paid, or $120,000. How much is your share worth now? A tidy $20,000. You still owe the house the whole $100,000. And if the price of the stock drops much more, the brokerage house will give you a call and ask you for its money. If the price drops substantially, they will sell off your position to sat-

isfy as much of the loan as possible.

Your share

= $200,000

Margin purchase (loan)

= $100,000

Total investment

= $300,000

Market drops by 60%; investment worth = $120,000

Your share

= $20,000

Loan balance

= $100,000

Document info
Document views691
Page views691
Page last viewedSat Dec 03 01:13:19 UTC 2016
Pages367
Paragraphs4568
Words116968

Comments