Buying securities on credit

Buying securities on credit in the five examples

In credit to buy not only houses, cars and other durable goods. In the credit of the purchase and securities. They, too, are very expensive, and lending is a natural means of competition between the sellers of securities. What motivates investors to buy securities in the loan and pay interest? This is done in the expectation that the value of the securities will grow faster than the interest on the loan. If credited so profitable, why not all and not always do this?
The market only then becomes civilized, where the buyer may take money loan under the pledge of its purchase, and the seller - to take Buying securities on credit, if he does not have his own or he does not want to part with them.
What motivates investors to buy securities in the credit and pay interest)? This is done in the expectation that the value of the securities will grow faster than the interest on the loan. If the securities of that merit buy, you need to buy on credit. The more money the client is, the higher the return on investment.
Buying securities on credit Example 1. Suppose the client it seems that the shares of AB for the year to rise from 1 up to 5 dollars. On his investment is 2 500 USD. You can buy it now for 2 500 shares and in a year receive 12 $ 500. The profit will amount to 10 000$. and the profit - 400% ($10,000). / 2 $ 500. * 100%). And can I borrow broker another 2 $ 500 under 100% per annum and buy 5 000 shares to a year to get a $ 25,000. Of this amount, we must deduct the loan and interest - only 5 000 USD. Remains 20 000 USD. The profit of the client is equal to 17 500 USD. (20 000 USD. - 2 $ 500), and the profit - 700% (17 $ 500. / 2 $ 500. * 100%).
If credited so profitable, why not all and not always do this?
Firstly, the credit - it is a stick about two ends. Leverage effect on the profitability of investments (when a market is rising), and on their unprofitability (when the market falls). In the previous example, the profit from the loan to 1.75 times higher than the rate of profit without credit. But if the stock price fell 5 times, the loss without credit would be 1.75 times less than the loss with the loan. Many investors do not make such statement of the question.
Secondly, at a constant share price, the investor loses money. The interest on broker loan. To the investor remained even if their price should grow at the same rate as interest.
Thirdly, not all securities allowed to buy on credit. What you can buy, but that can not decide for the investor bodies of regulation and self-regulation. For example, the Board of governors of the U.S. Federal reserve from time to time publish a list of what you can and what cannot. The more reliable the securities and the higher the price, the greater the share of credit in the value of their purchase. In the case of the bonds is recorded and maturity.
These formal restrictions, as the appearance of the fed, are related to the credit excesses of the 20-ies. Then some American banks willingly financed up to 90-95% of the value of share purchases. And if the share price rose at least 5-10%, the investor could use this increase for new purchases on credit, not taking out from his pocket a penny. Applying this «pyramid», even people with little income amassing a huge portfolios.
And Vice versa, fall on the same 5-10% could destroy the entire contribution of the investor.
So there was the Rule of «T», obliging Americans personally make not less than 50% of the market value of the purchase. This contribution is called the initial margin, or simply margin. The fed then decreases the level of margin, in order to stimulate the purchase of shares, then increases it, to calm down the speculators. Recognizing that the exchange rate of securities changes all the time, the law does not require that the margin has always been at not less than 50% of the market value of the securities. The investor is obliged to make an additional fee, if the margin has fallen below 25%. This figure is determined by the regulators and is referred to as recovery minimum for margin (by an additional investment of an investor recovers margin before the official level, i.e. up to 25%). Without this flexibility lending turns into a disservice.
Ïåðåñòðàõîâûâàÿñü, the company introduced their own, more stringent standards. For example, the minimum margin is not 25, and 30%; on new accounts margin (the difference between the market value and the loan) should be no less than 10 thousand USD; the transaction is not carried out, if the margin drops to 5 thousand us dollars; the loan may not exceed 25 thousand USD; purchase of shares at the price of below 3 $ is not credited. So before the violation of the official rules dealing rarely comes. Before them to break, the client violates trade rules.
For purchase of the securities to the credit of the client opens a special account of the Margin. With his help is provided by full use of own funds and credit capacity of the client and compliance with the regulator and the company itself lending standards. Account Margin consists of three parts: the market value of the securities, equity or margin (customer) and debit balance (brokerage loan to the client). With the change of the market value changes of equity (margin), and a debit balance does not change.
Before buying the customer shall pay to the account of only the margin component, according to the rule of «T», not less than 50% of the market value. The rest - broker loan. Then
Margin + Loan = Market value.
The proportion of the margin of + the Share of loans = 100%.
Loan forms a debit balance:
Market value - Margin = = = a Debit balance.
Interest accrued on a monthly basis at rates which are close to the rates of Bank lending to the brokers. Brokers take money from banks, put on the bet several of the points and lend to customers.
Buying securities on credit Example 2. Let for the purchase of 5,000 shares of ABC in credit to the client is required to Deposit a minimum of 50% of their market value and that the customer decided to borrow from the broker all of the 2 500 USD. The recovery minimum margin - the official 25% of the market value. Account after the transaction will look like this:
Market value: us $ 5,000. (5 000 shares * $ 1 a day.)
Margin: 2 500 USD.
A debit balance: 2 500 USD.
Further there are three options. The first (absurd for the client) - market value remains unchanged. The debt of the client will be periodically accrue on the amount of interest on the loan. And that's all.
The second option (bad for the client) - the rate has fallen, say, 20 cents. Then after the revaluation of the market, we have:
Market value: us $ 4,000. (5 000 shares * 0,8$.)
Margin: 1 500 USD. (us $ 4,000). - a debit balance)
A debit balance: us $ 2,500.
Initial ratio between the components of the account is lost, and a debit balance exceeded the margin. Should the client to make at the expense of (1) 1 000, to the margin is again equal to debit balance or (2) $ 500)., to margin again accounted for a half of the market value? Shall neither that, nor another. After all, the margin may not be lower than 25% of the market value, and now it is equal to 37.5 per cent.
What should be the market value of (x)to margin fell to 25%?
x < 0,25 * x + $ 2500.
x < $ 2500. / 0,75 = 3333 USD.
That's when the firm told to the client about the necessity to restore the margin to the official strip by means of an additional investment of money (or securities equivalent). And if the client has not done this, the firm had to sell part of its shares or to seek the authorities delay äîâëîæåíèÿ.
Let the market value fell to 3 000 us dollars.:
Market price: 3 000 us dollars. (5 000 shares * 0.6 USD).)
Margin: $ 500. (us $ 4,000). - a debit balance)
A debit balance: 2 500 USD.
The margin is only 17%. Up to 25% is not enough $ 250. Client money in a term not given; with the delay did not work, and the company sold its shares to 1 000 dollars. Then we have:
Market price: 3 000 us dollars. - 1 000 USD. = 2 000 USD.
Margin: $ 500. - 0 = $ 500.
A debit balance 2 $ 500. - 1 000 USD. = 1 $ 500.
Margin is now 25% of the market value. As already mentioned, the company sets a higher recovery at least for the margin, than the government. Let's say 25%and 30%. And when the margin falls below 30% (but still remains above 25%), the client receives the «company» notice of äîâëîæåíèè. The only difference between the notification and the notification of the restoration of the «official» 25% lies in the fact that, in the event of a rise in price of shares of «corporate» notice can be cancelled, and the «official» no. Even if the market value will increase 10 times, the client will have to make at the expense of the amount specified in the «official» announcement.
The third option (good for the client) - the rate has grown by 10 cents:
The market value of the 5 $ 500. (5 000 shares *1,1 USD.)
The margin of 3 000 USD. (5 $ 500. - a debit balance)
A debit balance 2 $ 500.
The new margin (equity) to $ 500 more than the initial. This excess is called margin excess. The client can either withdraw the excess from the account, or use it for a new purchase on credit. In the first case the debit balance would increase by the amount of the surplus for the withdrawal is equivalent to the additional loan. After the removal of the account looks like this:
The market value of the 5 $ 500. (5 000 shares *1,1 USD.)
A margin of 2 500 USD. (5 $ 500. - a debit balance)
A debit balance 3 000 USD.
In the second case the company may lend the client a maximum of $ 500. This additional thousand (surplus plus the new loan) form the purchasing power of the customer, i.e. the market value, which the client can pay without äîâëîæåíèé to the account.
Bought on credit securities are registered in the name of the company and remain at its disposal to maturity of the debt. They serve as collateral of the customer indebtedness of the company. If the insolvency of the customer the firm can sell them on such a sum, which is required for normalization account. The company also has the right to pledge securities in the Bank for the financing of the debit balance of supply them in connection with short sales of other clients and to lend other brokers (in exchange for their market value). Thus, the crediting of the client purchases puts the company under the press of Bank financing and at the same time creates for her source of cheap money.
The purchase of the shares are usually worth the idea of «buy low, sell high». The short sale is the same idea, but a read from the end: «sell expensive, buy cheap». Short sell - means to sell something that the seller does not belong to, or what he does not want to leave. If you are buying on credit investor borrows money from the broker (to buy shares), the short sale he borrows from the broker shares (to put it to the buyer).
The reason for the short sale is to be hoped that the sold shares in the future will be cheaper. Profit (or loss, if the hope did not come true) arises as the difference between the price of the short sale and the price of them. After repurchase shares are returned to the creditor.
Buying securities on credit Example 3. Let's shares are traded at $ 1 and the client decided to make a short sale. In his opinion, the change of the President of the company will lead to a fall in the share price over a month to 60 cents. To earn on this point, the client:
1. takes 5 000 shares of the company;
2. sell them for $ 1 a day.;
3. waiting for the month;
4. redeems by 0.6 USD);
5. returns 5 000 shares of the company;
6. fixes the profit in 2 000 USD. (5 000 USD. - 3 000 USD).
In this case the customer desperately risks: shares may increase, say, up to 1.5$. and then have to lose 2 $ 500. (7 500 USD. - 5 000 USD). Theoretically, the loss is unlimited: fully paid-up shares may fall in the price of only up to zero, but it is unknown how high can fly stock prices, which will have to buy.
And there are other problems, complicating the short sale. For example, it is difficult to find shares, to get them a loan for delivery to the buyer. The seller may not be able to maintain the margin at the proper level. He must creditor (as it remains in a short position) dividends and other benefits payable to the owner of the shares. The company is obliged to hold an emergency purchase, if the margin level is not high enough or the lender requires the return of shares (he can do it at any time).
With a short sale, as well as with the purchase on credit, caused a lot of financial UPS and downs. In the beginning of XX century large investors quite often held a short position in respect of one or another company. Their massive sale led to a reduction in the price of the shares. The small shareholders, not knowing why the price began to fall, panic and sell shares at a low price. And îòêóïàëè them - of course, with a profit of the major investors, who were on the short side. A short sale occupied a place of honor in two of the three main types of manipulation of the «old» market. She lay in the basis of êîðíåðîâ and were often used by managers pools (temporary associations of people pursuing speculative profit).
As well as buying on credit, short sale was placed under the control of regulators. Concept of «margin» and the recovery of at least» refers to a short sale. Before you make such a transaction, the customer shall make on your credit score half of the market value of the securities, i.e. half of the revenue from their sale at the market price. Itself revenue (short position) is added to the initial margin, forming a credit balance:
Short position + Margin = = = a Credit balance.
In other words, for a short sale the minimum credit balance on the account shall be equal to 150% of the market value of the shares. A credit balance means that the company is the debtor of the client, and not Vice versa. But the client, having sold other people's stocks, could delete the proceeds from the account or reinvest it. This sum is «frozen» on the account, so as to be farmed out for an unknown price and return of the shares to the real owner. The company, however, can use a credit balance in its business or earn interest on it. If the shares are obtained on the side, for example, another broker, the revenue serves as supply of a drain-loan.
Buying securities on credit Example 4. After a short sale the customer's account is as follows:
Short position: 5 000 USD. (5 000 shares * $ 1 a day.)
Margin: 2 500 USD. (0,5 * 5 000 USD)
A credit balance: 7 500 USD.
Change of the price of the shares entails the redistribution of funds between a short position and margins. Growth of the price means the growth of the short position at the expense of the margin. Reduction of prices means a rise in the margin at the expense of the short position. Let the price rose to 1.4 million.:
Short position: 7 000 USD. (5 000 shares * 1,4 mln.)
Margin: $ 500.
A credit balance: 7 500 USD. (7 000 USD. - margin).
From 2 500 margin dollars. 2 000 added to the short position that at any moment you could buy shares. As a result, the interest margin fell to 7%, and the company informed the client about the necessity äîâëîæåíèÿ (the short sale of the recovery at least for the margin - 30%).
Note, that growth of the price of a drain on the resources of the short seller, but strengthens the position of the credited to the purchaser. Suppose, in a month the price dropped to 0.6 USD):
Short position: 3 000 us dollars. (5 000 shares * 0.6 USD).)
Margin: the 4 500 us dollars.
A credit balance: 7 500 USD.
2 000 USD. (a result of lower prices) are summed up to 2 500 margin dollars. The client decides to close a short position. The shares are purchased on the 0.6 dollars and returned to the firm:
Short position: 0
Margin: the 4 500 us dollars.
A credit balance: 4 500 us dollars.
The company gives the client all that is in the account - 4 500 us dollars. This is 2 500 $ of the initial margin and 2 000 profit.
When you short sell too arises excess of the client's funds. This is the difference between the actual profit and the cash equivalent of restorative minimum for margin.
Buying securities on credit Example 5.
Short position: 3 000 us dollars.
Initial margin: the 4 500 us dollars.
To restore the margin needed: $ 900. (0,3 * 3 000 us dollars).
Surplus: us $ 3,600. (4 500 us dollars. - $900.).
The surplus is used for the calculation of growth rates, in which the firm shall inform the client about the necessity of restoration fee. The surplus is divided into recovery minimum plus 100%, and the quotient is divided by the number of shares. Let's remind, that growth of the price of empties margin.
Surplus: us $ 3,600.
The recovery of at least 30%of
Number of shares: 5 000
The price increase = 3 $ 600. / (0,3 + 1) / 5 000 = 0,55 USD. The client will receive a notification when the price reaches of 1.15 million. (0.6 USD). + 0.55 dollars).
To maintain the purchasing power of the clients there is a special ìåìîðàíäíûé account (VMS). Let's remind: the purchasing power is the sum of the excess and any other of the client's funds on the account. And it's a surplus of all, that over 50% of the market value. It occurs when the deal on the loan account profitable, and can be withdrawn from the account or used for new deals. But sometimes surplus disappears before the client has time to decide what to do with it. It's his money, but he had not used.
To this was not, every time there is a surplus, and his conduct on the loan SMS. And if the client wants to use the surplus, the necessary sums can be found in the SMS.
Systematize the basic knowledge of the concepts, the mechanism of functioning and safety of operations in the securities market you can having studied the course«securities Market» in the training according to the individual program. For additional study of the investment processes you can also include in its curriculum courses on investment and capital management, and financial management, learning at your own pace, place and time.

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