Margin requirement scenarios:

Scenario 1: Concentrated Account

You have $10,000 of cash.

• What is the margin requirement (initial margin requirement) needed to purchase ABC stock (regular requirement)?
• What is the maintenance margin requirement?

Answer

• 50% → You can purchase up to $20,000 worth of ABC;
• 50% → The maintenance margin requirement stays 50% because the account is concentrated. If the total value of your account drops below $20,000, a margin call will occur.

Scenario 2: Non-Concentrated Account

You have $15,000 worth of stock ABC bought using $5,000 on margin and $10,000 in cash.

• What is the margin requirement (initial margin requirement) to purchase stock XYZ (regular requirement)?
• How much XYZ stock can you purchase?

Answer:

• 50%
• $15,000 worth of ABC stock allows you to borrow up to $10,500 because ABC stock has a standard maintenance margin requirement of 30%.

  You have now used $5,000 out of your $10,500 margin buying power, which leaves you with $10,500 - $5,000 = $5,500 in cash power. The $5,500 can generate another $5,500 in margin buying power which allows you to purchase up to $11,000 worth of XYZ stock.

Scenario 3: The value of my positions did not drop, why am I getting margin calls?

Usually a margin call occurs when the market value of your marginable positions drops and you failed to maintain your equity above the minimum maintenance requirement.

But there are cases when the value of your positions goes up and you receive a margin call. The reason is that even though you have multiple positions in your account, your account becomes concentrated if the value of one of the positions is over 60% of the market value of your marginable securities.

e.g. You have $24,000 worth of marginable securities in your account consisting of $8,000 worth of equity and $16,000 worth of margin:

Symbol	Market Value	%
ABC	$5,000	20.83%
XXX	$5,000	20.83%
XYZ	$14,000	58.33%

The minimum maintenance margin requirement for you now is:
($5,000 * 30%) + ($5,000 * 30%) + ($14,000 * 30%) = $7,200 → smaller than the $8,000 equity.

Today, the price of stock XYZ goes up and the market value reaches $16,000. The new proportion of each holding in your account is as follows:

Symbol	Market Value	%
ABC	$5,000	19.23%
XXX	$5,000	19.23%
XYZ	$16,000	61.53%

Since the margin amount always stays the same, your account is now worth $16,000 on margin and $10,000 in equity.

The market value of XYZ is now over 60% of all the marginable securities. If the maintenance margin requirements for the 3 positions are all the standard requirement of 30%, the maintenance requirement of stock XYZ becomes 50% because now the account is considered concentrated.

At this time, the minimum margin requirement for you becomes:
($5,000 * 30%) + ($5,000 * 30%) + ($16,000 * 50%) = $11,000 → larger than the $10,000 equity and a margin call occurs.

Margin Buying Power Scenarios:

Scenario 1 :

You have $10,000 in cash on your account and you wish to purchase stock ABC on margin. If stock ABC has a 50% initial margin requirement, then your margin buying power is as follows:

$10,000 / 50% = $20,000 → Your Margin Buying Power

Scenario 2 :

You have $10,000 worth of stock ABC bought using $8,000 in cash and $2,000 on margin. Now if you would like to buy stock XYZ (regular 50% initial margin requirement) on margin, how much is your margin buying power?

Answer:

Although the initial margin requirement of stock ABC is 50%, the maintenance margin requirement of ABC is 30%.
$10,000 * (100%-30%) = $7,000 → the maximum amount you are eligible to borrow.

$7,000 - $2,000 = $5,000
→ Now you have used $2,000 of the available margin, your current available margin becomes $5,000 which is also your cash buying power.

$5,000 / 50% = $10,000 → the margin buying power for purchasing stock XYZ.

Scenario 3 :

You have $10,000 worth of stock ABC bought using $8,000 in cash and $2,000 on margin. Now if you would like to buy stock XXX (75% margin requirement) on margin, how much is your margin buying power?

Answer:

Although the initial margin requirement of stock ABC is 50%, the maintenance margin requirement of ABC is 30%.
$10,000 * (100%-30%) = $7,000 → the maximum amount you are eligible to borrow.

$7,000 - $2,000 = $5,000
→ Now you have used $2,000 of the available margin, your current available margin becomes $5,000 which is also your cash buying power.

$5,000 / 75% = $6,666.6 → the margin buying power for purchasing stock XXX.

Margin Call Scenarios:

Scenario 1 : How does a Margin Call occur?

You have $20,000 worth of securities bought using $10,000 on margin and $10,000 in cash. When the margin requirement is 30% and the value of the securities drops by 30% to $14,000, since the amount you borrowed from your broker stays at $10,000, your own equity becomes $4,000 which is lower than the 30% minimum margin requirement.
$4,000/$14,000 = 28.6% < 30%

A margin call occurs when the percentage of the equity in the account drops below the maintenance margin requirement.

Scenario 2 : How much is a Margin Call?

Following the scenario above:
$14,000*30% = $4200 → amount of equity you were required to maintain.
$4200 - $4000 = $200 → You have a $200 margin call.

Scenario 3 : How do I cover a Margin Call?

If you would like to deposit funds, the amount has to be equal to or more than the margin call amount.

If you choose to liquidate your stocks to cover the call, the amount you have to sell is equal to the margin call amount divided by the minimum maintenance requirement.

Following scenario 1 & 2:
$200/30% = $666.7
→ To maintain the 30% minimum margin requirement, you will need to either sell $666.7 worth of securities or deposit $200 worth of cash within 5 trading days, or Firstrade must liquidate your positions.

Good Faith Violation Scenario

(Cash account only) Amy starts on Monday with 100 settled shares of XYZ stock, and sells them for $2,000. The proceeds from the sale will settle on Thursday (T+3), but Amy decides to go ahead and invest the unsettled proceeds in UVW stock, which she buys for $1,000. On Wednesday before the XYZ trade settles (T+2), Amy sells her UVW stock for $1,500.

In this case, Amy created a Good Faith violation by selling her UVW stock prior to the settlement of the XYZ proceeds used to buy it. Learn more about Good Faith Violations.

90-Day Restriction Scenarios

Scenario 1 : An investor day trades using unsettled funds.

Nick had a $1,000 account balance in his cash account on Monday. He then bought $1,000 worth of ABC stock and sold it on the same day. Later that same day, Nick saw the price of ABC drop and decided to buy another $1,000 worth of ABC stock using the unsettled funds he had from selling ABC stock earlier. A 90 day restriction occurs.

Scenario 2 : When an investor sells securities that were not fully paid for by the settlement date.

Jake has $1,000 in cash in his account and he decided to place a market buy order on ABC stock on Monday. The market price inadvertently went up, and the order was executed at a higher price. Jake ended up buying $1,300 worth of ABC stock that was not fully paid for.

Since the trade was made through a cash account where no margin trading is allowed, Jake has to deposit $300 within 5 business days before selling the security. If he sells this position without fully paying for the security, his account will face a 90-Day Restriction.

Pattern Day Trader Scenarios

Scenario 1 : Assets over $25,000

Mia has $30,000 in her margin account. Her trading activities for the past week are as follows:

Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday
Buy ABC Sell ABC	Buy ABC	Sell ABC	Buy XYZ Sell XYZ	Buy ABC Sell ABC
				Short Sell XYZ Buy XYZ

> She became a pattern day trader because she did 4 (more than 3) day trades in 5 business days. But since she has over $25,000 in her margin account, being listed as a pattern day trader will not influence her trading privileges as long as her account value remains above $25,000.

Scenario 2 : Assets under $25,000

Jeff has $20,000 in his margin account. His trading activities for the past week are as follows:

Monday 1/1	Tuesday 1/2	Wednesday 1/3	Thursday 1/4	Friday 1/5	Saturday	Sunday
	Buy ABC	Sell ABC	Sell XYX Buy XYZ	Short Sell XYZ Buy XYZ

Monday 1/8	Tuesday 1/9	Wednesday 1/10	Thursday 1/11	Friday 1/12	Saturday	Sunday
Sell XYZ	Buy ABC	Sell Short ABC
Buy XYZ	Sell ABC	Buy ABC

> He became a pattern day trader because he did 4 (more than 3) day trades in 5 business days. Since his account has less than $25,000 in assets, he can no longer do day trades until he deposits more funds to his account in order to maintain a total account value of over $25,000.