Margin 
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

Legally, a payment on account of a purchase, conferring ownership with its attendant risks and privileges upon the buyer, but subjecting him to a lien on the purchase to the extent that credit is advanced to finance the full purchase price secured by the purchase.  Such margins are dollar margins; e.g., where a customer deposits in a brokerage account $1,000 on the purchase of 100 shares of a stock at $25 per share, his dollar margin is $10 per share or ten points.  Equity margins – the type specified by the margin requirements regulation of the Board of Governors of the Federal Reserve System and by stock brokers in modern times – are measured not by the amount of cash deposited on the purchase but by the ratio between the customer’s equity and the current market value of the purchased securities (on which the lending broker has a lien for the credit extended).  Equity margins may be computed readily by the appended formula:

Thus, if 100 shares of stock were bought at a total purchase cost (including commissions) of $50 per share on 50% margin, the current market value of the collateral (the stock bought is pledged for the margin credit) of $5,000, minus the debit balance (the amount owed by the buyer for the margin credit extended, which will be charged interest monthly) of $2,500, divided by the current market value of the shares ($5,000) indicates percentage margin of 50%.  Should the market price decline to $50 per share, the percentage margin would be 37,5% (new current market value of $5,000, minus the debit balance of $2,500 [ignoring interest], divided by current market value of $4,000).

A further distinction as to margins is the difference between initial margins and maintenance margins.  Margin requirements prescribed by the Federal Reserve Board of Governors are only initial margins (although the board has the power to prescribe maintenance margins); should the market price of stock bought on margin decline subsequent to purchase, the account would become restricted, but the board’s regulations do not require the posting of additional equity by the purchaser to restore the percentage margin to the initial margin.  However, Regulation T of the board of governors does not prevent a brokerage firm from imposing additional requirements, particularly maintenance requirements.  Rule 431 of the New York Stock Exchange (NYSE) provides a maintenance margin rule that must be applied by a broker; and Section 220.7(e) of Regulation T provides that nothing in the regulation shall prevent brokerage firms from imposing maintenance requirements.

For the purpose of effecting new securities, transactions and commitments, the NYSE rule requires that margin shall be at least the greater of the amount specified in the regulations of the Board of Governors of the Federal Reserve System or by the above NYSE requirements, or such great amount as the exchange may from time to time require for specific securities, with a minimum equity in the account of at least $2,000 except that cash need not be deposited in excess of the cost of any security purchased.  These minimum equity and purchase provisions shall not apply to “when distributed” securities in cash accounts and the exercise of rights to subscribe.

In addition to assigning a current loan value to margin stock generally, Regulations T and U of the board of governors permit special loan values for convertible bonds and stock acquired through the exercise of subscription rights.

Margin requirements of both the Board of Governors of the Federal Reserve System and the New York Stock exchange also apply to short sales.  In figuring percentage margins on short sales the following formula may be used:

Thus if 100 shares of a stock are sold short at $50 per share net (net proceeds after deduction of commissions, stock transfer tax, and SEC fee).

Subsequently, should the stock rise (unfavourable for the short seller) to $55 per share, the percentage margin would then be

BIBLIOGRAPHY

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.  Annual Report. CURLEY, M.T.  Understanding and Using Margin, 1989.  

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