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Stock market hedging guidlines for Orissa
How to earn huge money from stock market, how can we buy and sell stocks at right time, what are the tricks and tips to earn easily from stock exchanges? This article gives every detail to earn money from stock markets.
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Leverage with margin in stock market
Margin has many different meanings, like quite a few terms used by the financial community. You will find that its meaning in stock trading is very different from its meaning in options trading.
In stock trading, it refers to the amount of money you are required to put up when you purchase stock. Put another way, it indicates how much you can borrow from your broker to buy stock. For instance, if you purchase $4,000 worth of Citicorp common stock for $2,000, your margin is 50 percent.
How much can you borrow from your broker to purchase stock? It varies and depends upon Federal Reserve requirements, stock exchange regulations, and broker guidelines.
Two type of margin requirement in stock market
There are actually two types of margin requirements, initial and maintenance. The Federal Reserve sets initial margin rates. It uses these rates as one of its economic controls. Since 1974, the initial margin requirement for buying long and selling short has been 50 percent. From October 16, 1958, until July 27, 1960, it was at its second highest rate, 90 percent it was at 100 percent from January 21, 1946, until January 31, 1947.
This means that, given the current rate of 50 percent, to make your first margin purchase on 200 shares of the New York Times, traded on the American Stock Exchange at $28 per share, you would have to put up $2,800. Your broker would put up the rest. Your margin need not be in cash. The Federal Reserve allows you to use other securities as collateral.
The other type of margin—maintenance margin—is set by stock exchanges and brokers, and is not necessarily uniform. But in every case, the stock exchanges in the United States require that you deposit $2,000 in cash or collateral with the broker to cover your first margin purchase. This means that even though the Federal Reserve only requires 50 percent initial margin, if you buy, for example, $2,500 worth of Novell (NASDAQ), you must deposit $2,000. (Many foreign exchanges do not allow margin purchases.)
Federal reserve margin requirements
G- Regulates margin credit to be offered by anyone other than brokers, dealers, and bankers who must register with the Federal Reserve Board of Governors.
T- Regulates credit extensions made by securities brokers and dealers. Designed to guard against preferred treatment of brokers and dealers to establish margin requirements, and governs cash transactions among brokers, dealers, and customers.
U- Regulates credit extended by banks. Designed to limit any credit that is secured by stock.
X- Extends the provisions of Regulations G and T to borrowers of the other nations. Assures adherence to applicable margin requirements governing any credit agreement within the U.S.
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