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Margin

Margin enables investors to purchase securities with borrowed money from a broker.[1] “Reg T” is the regulation related to Margin, and it establishes the minimum down payment (e.g. 50% of security’s value) called the “margin”. Besides the margin formulas summarized below, other import margin rules include: 1) Options & mutual funds cannot be bought “on margin”, but they can be bought “in a margin account”, and 2) Retirement & UGMA/UTMA accounts cannot be setup as margin accounts. 

MARGIN FORMULAS

  • Long

    • LMV = Long Market Value

    • Reg T = .5(LMV)

    • Down Payment >= .5(initial LMV)

    • Dr = debit (initially equal to Down Payment)

    • Equity = LMV – Dr

    • SMA = Excess Equity = line of credit = Equity – Reg T (ring in tub)

    • Min = SRO minimum maint. requirement = .25(LMV)

    • Call = max{0, Min – Equity}

  • Short

    • SMV = Short Market Value

    • Reg T = .5(SMV)

    • Down Payment >= .5(initial SMV)

    • Cr = credit (initially equal to Down Payment + initial SMV)

    • Equity = Cr – SMV

    • SMA – I think this is NA for short positions

    • Min = SRO minimum maint. requirement = .30(SMV)

    • Call = max{0, Min – Equity}

  • Combined Equity

    • Equity = Long Equity + Short Equity

  

My Take

Remember what happened to Randolph and Mortimer Duke in “Trading Places” (see below)?

President of Exchange: Margin call, gentlemen.
Mortimer Duke: Why, you can’t expect us to –
Official #1: You know the rules of the exchange, Mr. Duke. All accounts to be settled at the end of the day’s trading, without exception.
Randolph Duke: You know perfectly well we don’t have $394 million in cash!

Since Margin is not debt incurred on a depreciating item, per se, I do not consider Margin as toxic Consumer Debt; however, the market does “depreciate” significantly from time to time.

References

Investopedia
Wikipedia
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