0

Let's say I open an account with a broker (plus500.com), to invest on margin.

I want to open a position (in that case £100 on CDR:WSE) without leverage. It asks me an initial margin of 100%, meaning I have to provide the full £100 to be able to buy.

Now I also see they have a maintenance margin of 50%, meaning I will get a margin call if my £100 drop to £50:

If my understanding is correct, a maintenance margin is here to recoup the loan the broker gave me, in case my investment doesn't perform. But in that case there is no loan.

How does that make sense?

4
  • 1
    Can you enter positions that can have negative value? Like shorting stocks?
    – user253751
    Jan 28 at 18:37
  • Is that what you are asking about? i.stack.imgur.com/FXMW7.png i.stack.imgur.com/6KiKq.png Jan 28 at 20:42
  • Simple: You might have a loan in the future and you might use your holding of this stock as part of your collateral on that loan. So it's helpful to know how this equity will be counted for that purpose. Jan 28 at 23:16
  • @DavidSchwartz Could you elaborate more please? Maybe with an answer? I'm quite green on that subject. Jan 28 at 23:27
1

I'm not familiar with your broker, with the security you mentioned, your currency or your locale so this is a U.S. centric answer.

If you buy a security such as a stock, option or ETF with 100% cash (no margin), you have no risk beyond the cost of your investment.

In the case of a fully paid 100% cash purchase of a security, an account (usually a margin account) may list the margin requirement despite no utilization of margin.

However, if margin is employed, then the maintenance margin amount (lower than the initial margin) is what the regulatory authorities deem to be the safety level below which the broker will sell your position if you do not provide addition margin. The equity value (what you can sell the security for) is what enables the broker to recoup a loan if you utilized margin.

Maintenance margin is a calculation based on the ratio of account equity to broker loan. If initial margin is 50% and maintenance margin is 25%, it does not mean that your investment can drop 25% in value. It means that the ratio of equity/loan can drop from 0.50 to no lower than 0.25

For example, if you buy $10k on 50% margin, you need to put up $5k in cash or marginable securities. If the position loses 1/3 of its value, your position will be worth $6,667 and you equity will be $1,667. $1,667/$6,667 is 25%. Below $6,667 you will get a margin call. The short formula for calculating this is 4/3 the debit balance (4/3 * $5k).

My best advice? Call your broker for clarification.

1
  • Yes, that's exactly how I understand the situation is. But it's still not logical to me. As to call my "broker", it's just a mainstream platform for amateur investors, pretty sure they won't priovide with adhoc advisement. The question is more kinda out of curiosity. Jan 28 at 23:34

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.