How to choose a broker

How to choose a brokerHow to choose a broker? When choosing a broker, you need to consider what maximum amount you can borrow when you use your margin account to buy new shares for margin. This initial margin requirement allows you to borrow up to 50% of the value of new shares. If, for example, you open a new margin account with a cash deposit of $ 10, then you can buy shares worth $ 20. After you purchase shares worth $ 20, the cash balance in your account is $ 0, the share balance is $ 10,000, and the margin balance is also $ 10,000. In this case, all your shares are associated with this trade, so you cannot enter what new positions, unless you deposit additional money into your account?

 

If the price of your shares goes up, then your equity balance will increase. If the price of your shares decreases, then your share capital will also decrease. In both cases, your margin balance will remain unchanged - $ 10,000. The only way to reduce your unpaid margin balance is to deposit additional money into your account or sell the relevant shares.

 

When the price of your shares rises, your equity balance increases, and you can use this increased equity balance as collateral for borrowing extra money to purchase additional shares. You can borrow an amount not exceeding the value of the increased shareholder balance. This will increase your margin balance.

 

However, if your shareholder balance goes down, NYE and NAD exchanges regulate the minimum shareholder position allowed in your account. Currently, this minimum is 25% of the total value of the margined securities. Some brokers may require a larger percentage.

 

In the example of a single shareholding earlier in this chapter, if the total value of the shares falls below $ 13,332, then the shareholder balance in your portfolio will be less than 25% of the total value. The mathematical calculations in this case look quite simple: 25% of $ 13,332 is $ 3,333. Your cash balance is still $ 0, and your margin balance is still $ 10,000. To determine your shareholder balance, you need to subtract $ 10,000 from $ 13 332, with the result that we get $ 3 332.Thus, your shareholder balance turned out to be less than 25% of the total balance in your account.

 

When this happens, your broker will contact you and will require additional collateral required to support the unpaid margin loan. This is called a margin call. You can fulfill your marginal call requirements by depositing extra money into your account or by transferring fully paid, un-issued securities to your account from some other account. If you do not put an extra on your account

Appeal to the broker: what options are at your disposal 73 collateral, your broker has the right to sell a maximum of four times the number of shares required to satisfy your marginal circulation, and can sell any shares in your portfolio.

 

If you have a sufficiently large number of positions, margin calculations become more complicated. This situation can be imagined as follows. By initiating a new position, under no circumstances can you borrow more than half the value of this position. In order to maintain a sufficient level of collateral, your broker will insist that the value of your shares exceed that loan.Therefore, if your shareholder's balance falls below 25% of the total portfolio value, your broker will require - in the form of margin calls - additional collateral.

 

As a trader, in no case should you satisfy the marginal treatment. Instead, you must close out questionable positions. It is possible that any emergency will lead to a fall in the value of your shares below the amount corresponding to your unpaid margin loan. In this case, your broker will close your positions, but you still have to pay this debt. Unlike a cash account, you can lose more than 100% of the money placed in your margin account.

 

Note. Not all stocks can be bought on margin and not all stocks can be used as collateral. If you want to trade on margin, carefully read the margin requirements set by your broker. Some brokerage firms put forward even more stringent requirements for maintaining a margin account, especially if you trade shares that price varies widely or "easily traded" shares.

 

In 2001, Rule 2520 of the NAD was amended to limit day trading. Your broker or NAD will consider you a day trader after you buy or sell any security on the margin account on the same day and execute at least four such trading operations during a five-day business period. If you are identified as a day trader, you are obliged to maintain $ 25,000 in your margin account, which can have a serious impact on your daily trading and other trading activities.

 

Payment for trading

When you place an order to purchase shares, you must pay the relevant transaction within three business days. This payment cycle is usually referred to as T + 3. The brokerage firm must receive your payment for any securities you have bought no later than three days after the execution of the relevant trade operation. If you sell stocks, they are probably in your brokerage account and will be withdrawn from this account on the day of payment.



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