A. Margin Trading
1. How it works
- Example: Assume you have $2000 to invest. The margin requirement is equal to 50%. The margin loan costs 15% per year. Further assume that you buy the stock at $50/share.
- a. If you don’t use margin, you can purchase a total of 40 shares ($2000/$50). Suppose after 1 year the stock has a price of $60/share.
- Profit $2400 - $2000 = $400
- Return $400/$2000 = 20%