Debt Management and Leverage

Margin lending

Margin calls

If you had funds available to reduce the loan balance, the amount required to bring the borrowing percentage back to 75% is worked out in two steps:

1. New borrowing limit is 75% of $90,000 = $67,500.

2. Amount to realign the borrowed amount is:

       Old Limit                -$75,000

       New Limit              –$67,500

Additional cash contribution required to address margin call is $7,500.

In this situation, if you do not have surplus funds elsewhere to make the cash contribution you will need to sell some of your shares. This may contradict your investment goal of holding them for a long time. It may also cause you to sell them for a loss.

Often there are strict time constraints with only a day or two to rectify the situation. So you may be forced into a sale position. Accordingly, it is important to understand the arrangement that you may be committing yourself to.