Activity Sheet 2: Buying on Margin Table
Margin is the minimum amount of collateral, in either cash or securities that you
must have in your account to buy on margin. Federal law sets that initial margin
requirement. The Buy Margin Requirement in The Stock Market Game is 50% of
the value of your long positions and the value of your short positions.
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Brokers issue a margin call if your equity in your margin account falls below the
required maintenance level of at least 30%. If you get a margin call, you must
deposit additional cash or securities to bring the balance of the account back up
to the required level. If you don’t meet the call, securities in your account may
be sold, and your broker repaid.
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Suppose investors Sara, Jake, and Mike want to buy stock on margin, each has
decided to purchase a different number of Tulip stock. Each share purchased is
$10 and each investor will have to invest 50% of the total. Complete the table
for Sara, Jake and Mike.
Here is the calculation of maintenance margin requirements. If the value of
shorts is negative, ignore the minus sign.
Maintenance Margin Requirements = 0.30 x (value of longs + value of shorts)
Individual
Investor
Total Amount
Invested in
Tulip stock
Sara
(Value of longs
No shorts in
this example)
$10,000
Jake
$20,000
Mike
$30,000
Total Shares
Purchased
($10 per
share)
Minimum
Amount
Invested by
Each
Individual
(50% of total)
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Margin
Account
Balance
(30% of total)
1. Suppose Tulip stock increase to $15 per share.
How much will Jake’s total investment be worth?
How much will Mike’s total value be if the share price increases to $20?
2. Suppose the share price of Tulip stock decreases to $2 per share.
What will be the total value of Sara’s stock?
How much will Sara have to add to her margin account?
3. When participating in The Stock Market Game, what should your team
consider before buying on margin? Do you think your team should buy on
margin? Explain.
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