Would the loan value plus margin be based on the current market - ProProfs Discuss
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Would the loan value plus margin be based on the current market value?

Asked by Cedrick, Last updated: Sep 26, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Your analysis is incorrect. the loan value is based on the current market value, butthe loan plus margin is always based on the original value of the transaction. if thiswerent the case then it would never be worth an investors time to buy on margin.at the original price, jill buys 1000 shares at $10. she is eligible for a loan of 50% (or$5,000) and therefore her margin requirement is $5,000 ($5,000 loan + $5,000 margin= $10,000 original transaction value).if the stock price increases to $12, the broker is willing to loan 50% of the market valueor $6,000. the investors margin requirement drops to $4,000 ($6,000 loan + $4,000margin = $10,000 original transaction value).if the stock drops in price to $2, the broker is willing to loan 50% of the market value or$1,000. her margin requirement increases to $9,000 ($1,000 loan value + $9,000margin = $10,000 original transaction value).intuitively this makes sense. as the market price increases, the investor should beturning a profit and not contributing more and more money. as the market pricedecreases, the investor would be turning a loss and should be contributing moremoney to keep the transaction alive.
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