Question

"An investor purchases $10,000 worth of marginable stock in his margin account. If the investor wishes to pay for this trade using $5,000 of fully paid marginable stock, how much more in cash, if any, will the investor need to deposit?"

Answer 1

Answer:

The investor needs to deposit cash of $5,000.

Explanation:

a) Data and Calculation:

Worth of marginable stock in the margin account = $10,000

Fully paid marginable stock = $5,000

Cash deposit required = $5,000 ($10,000 - $5,000)

b) An investor's margin account is a brokerage account which an investor opens with his or her broker to enable him or her to purchase more securities using the broker's funds (on loan).  For instance, the investor can deposit at least half of the funds required to purchase the securities, while the broker lends the investor the balance.  This arrangement gives the investor some leverage to purchase more securities than he could afford with his or her own funds.  The broker charges the investor some interest for the loaned funds.  If the securities appreciate in value, the investor gains, but if they depreciate, he loses money on the margin account.