Margin
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To sell short, a broker will require you to put up minimum collateral
of 50 percent of the value of the short position. If the collateral, less
any unrealized losses, falls to 30 percent of the value of the original
short position, or if the stock price rises so that the collateral minus
losses equals only 30 percent of the short position, you will receive
a margin call. This means you must add additional assets to bring
the value of the collateral, less losses, back up to 50 percent of the
short position or, alternatively, liquidate the account. Trick or treat.
Don't worry. If you use common sense, you won't get a margin call.
Margin used properly is the path to riches. Just don't get greedy;
use it intelligently.
When you open a margin account, you must sign a hypothecation
agreement, which says you will pledge your stocks as collateral
against your loan. The rehypothecation agreement allows your broker
to loan your stocks to a bank or to other customers. Rehypothecation
is the pledging of the client's securities to secure loans from banks. In
this way, securities firms can afford to carry margin accounts for their customers. Securities worth 140 percent of a client's debits is
the legal maximum that may be rehypothecated.
To sell short, a broker will require you to put up minimum collateral
of 50 percent of the value of the short position. If the collateral, less
any unrealized losses, falls to 30 percent of the value of the original
short position, or if the stock price rises so that the collateral minus
losses equals only 30 percent of the short position, you will receive
a margin call. This means you must add additional assets to bring
the value of the collateral, less losses, back up to 50 percent of the
short position or, alternatively, liquidate the account. Trick or treat.
Don't worry. If you use common sense, you won't get a margin call.
Margin used properly is the path to riches. Just don't get greedy;
use it intelligently.
When you open a margin account, you must sign a hypothecation
agreement, which says you will pledge your stocks as collateral
against your loan. The rehypothecation agreement allows your broker
to loan your stocks to a bank or to other customers. Rehypothecation
is the pledging of the client's securities to secure loans from banks. In
this way, securities firms can afford to carry margin accounts for their customers. Securities worth 140 percent of a client's debits is
the legal maximum that may be rehypothecated.