Basic Types of Transactions

Long Purchase

Margin Trading

Short Selling

Margin Trading

Types of Margin

Initial Margin: Initial margin stipulates the minimum amount of equity that must be provided by the investor at the time of purchase.

Maintenance Margin: Maintenance margin is the absolute minimum amount of margin (equity) that an investor must maintain in the margin account at all times.

Margin = (Value of Sec. -Debit Balance) / Vaue of Sec.

Magnified Profit and Losses (Example discuessed in class)

Return on Invested Capital: (total current income received - total interest paid on margin load + market value of securities at sale) / Amount of equity invested

Uses of Margin Trading:

Margin trading is most often used in one of two ways. As we have seen, one of its uses is to magnify transaction returns. Another major margin tactic is called pyramiding, which takes the concept of magnified returns to its limits. Pyramiding uses the paper profits in margin accounts to partly or fully finance the acquisition of additional securities.

Short Selling

Short selling is generally defined as the practice of selling borrowed securities. Securities borrowed from a broker are sold in the market-place. Later, when the price has declined, buys back the securities and returned to the lender.

The lender’s primary concern in a short sale is that the securities being shorted are provided total and constant protection.

Return on Invested Capital: (proceeds from sales - purchase cost - dividend paid by short seller) / equity deposit