Which Of The Following Best Describes The Purpose Of A Hypothecation Agreement In A Margin Account

Jane buys a share in a company for $100 with $20 of her own money and $80 lent by her broker. The net worth (the share price decreased from the amount borrowed) is $20. The broker wants a minimum margin of $10. Marginal accounts can be very risky and not suitable for everyone. Before opening a margin account, you need to understand the following: for a client who is a “model tag trader,” FINRA requires the broker to impose special margin requirements on the client`s margin account. In general, these include a minimum capital requirement of $25,000 and a limit limiting the purchasing power of the margin account to four times the surplus of the maintenance margin at the close of the previous day`s trading for equity securities. More information on these margin requirements for day-type traders can be found in our Investor Bulletin: Margin Rules for Day Trading. However, if the stock had fallen to $2.50, all of the client`s money would have disappeared. Since 1,000 shares – $2.50 is $2,500, the broker would inform the client that the position will be closed, unless the client no longer places capital in the account. The client has lost his money and can no longer hold the position. It`s a call to the margins.

In addition to buying securities, some brokers may allow them to use margina loans for personal or business financial purposes, such as. B the purchase of real estate, the payment of personal loans or the provision of capital. The use of marginal loans on non-financial securities does NOT change the way these loans operate. These credits are always guaranteed by the securities in their margin account and are therefore subject to the same risks as those associated with the purchase of securities on the margins, as follows. The terms of these credits vary from one denbroker and are generally stipulated in the margin agreement. You should carefully consider the margin risks described above and any fees that may be associated with these loans before using them for non-asset securities. A “cash account” is a kind of brokerage account on which the investor must pay all the securities purchased. An investor who uses a cash account does not have to borrow money from his dealer to pay for transactions in his account.

The downside of using the margin is that if the share price falls, significant losses can increase rapidly. Suppose the stock you bought for $50 drops to $25. If you have fully paid the stock, you lose 50% of your money (your loss of USD 25 is equal to 50% of your initial investment of $50). But if you bought on a margin, you lose 100 percent (your loss of 25 USD represents 100% of your initial investment of $25) and you still have to make up the interest you owe on the loan. For FINRA`s resources related to margina accounts Please read the alert “Investment with Borrowed Funds: No “Margin” for Error and FINRA`s Investor Bulletins “Purchasing on Margin, InvolvIng Risksed with Trading in a Margin Account” and “Understanding Margin Accounts, Why Brokers Do What They Do” For example, if a trader earns 10% on the margin in two months, would be annualized about 77% the investor has the potential to lose more money than the funds deposited in the account.