Assume an investor buys 100 shares of stock at 35 per share

Assume an investor buys 100 shares of stock at $35 per share, putting up a 75% margin.

a. What is the debit balance of this transaction?

b. How much equity funds must the investor provide to make this margin transaction?

c. If the stock rises to $55 per share, what is the investor\'s new marginal position?

Solution

a)

Total price = 100 * 35 = $3,500

1 - 0.75 = 0.25

Debit balance = 0.25 * 3,500 = $875

b)

Margin = 3,500 - 875 = $2,625

c)

New value = 55 * 100 = 5,500

Margin = ( New value - debit balance) / New value

Margin = ( 5,500 - 875) / 5,500

Margin = 0.8409 or 84.09%