Assume that an investor buys 100 shares of stock at $50 per share, putting up a 60% margin.

a. What is the debit balance in this transaction?

b. How much equity capital must the investor provide to make this margin transaction?

c. If the stock rises to RM 80 per share,what is investor's new margin transaction?

d. Kindly advise investor the pros and cons when involve in margin trading?

a). Debit balance in this transaction = $2,000

b). Equity capital must the investor provide = $3,000

c). If the stock rises to 80 per share.

New Margin position = 75%

Amount of new margin = 6,000

d). Pros of margin trading:

1. It increases your purchasing power.
2. Small amount required to purchase the higher value of securities.

Cons of margin trading:

1. Using margin trading makes your portfolio leveraged.
2. Increases risk of loss.

Step-by-step explanation

Number of shares purchased = 100

Price per share = $50

Total securities price = 100 * $50 = $5,000

Margin requirement = 60%

a). Debit balance in this transaction = Amount loaned = Total securities price * (1 - margin percentage)

= $5,000 * (1 - 0.60)

= $5,000 * 0.40

= $2,000

b). Equity capital must the investor provide = Total securities price * Margin percentage

= $5,000 * 0.60

= $3,000

c). If the stock rises to 80 per share.

New value of securities = 100 shares * 80 = 8,000

Debit balance = 2,000

New Margin = (New value - Debit balance) / New Value

= (8,000 - 2,000) / 8,000

= 6,000 / 8,000

= 0.75 or 75%

Amount of new margin = 6,000

d). Pros of margin trading:

1. It increases your purchasing power.
2. Small amount required to purchase the higher value of securities.

Cons of margin trading:

1. Using margin trading makes your portfolio leveraged.
2. If you buy the higher value of securities using the small amount, your buying amount is more than what you can actually buy and results in increasing risk and if that security goes against your preferred direction that it may result in loss higher than what you invested in portfolio i.e. loss can be higher than capital.