Stocks & Commodities V. 25:6 (98, 97): At The Close by J.L. Lord
New Margin Rules (Part I)
On April 2, 2007, the Securities and Exchange Commission (SEC) granted permission to the retail brokerage industry to adopt margin requirements in the style of those used by the Chicago Board Options Exchange (CBOE). For many investors, the new rules represent a significant addition to their purchasing power. It makes sense that these investors would want to know not only how they got the extra money, but what they are allowed to do with it.
WHAT IS MARGIN?
Whenever a trader initiates a trade, a broker will require
money from that trader up front in order to help ensure that the winning party gets paid. That amount of money is referred to as a margin requirement.
The typical margin requirement for a stock purchase is
50% of the purchase price of the stock. For an investor
looking to purchase 100 shares of Google, Inc. (GOOG), currently trading for $450 per share, the funds necessary to own this position would be:
$450 (per share) x 50% x 100 shares = $22,500
The idea is that if GOOG loses half of its value, the broker has set aside enough funds to pay for his investor’s loss.