How Low Can It Go?
In our previous example (Example), suppose the maintenance margin was 40 percent. At what price per share would you have been subject to a margin call?
To answer, let P * be the critical price. You own 300 shares, so, at that price, your stock is worth 300 X P *. You borrowed $6,600, so your account equity is equal to the value of your stock less the $6,600 you owe, or 300 X P * $6,600. We can summarize this information as follows:
Amount borrowed = $6,600
Value of stock = 300 X P *
Account equity = 300 X P * $6,600
From our preceding discussion, your percentage margin is your dollar margin (or account equity) divided by the value of the stock:
Margin = Account equity / Value of stock
=300 X P* $6,600 / 300 X P*
To find the critical price, we will set this margin to the maintenance margin and solve for P *:
Maintenance margin = Number of shares X P* Amount borrowed / Number of shares X P *
Solving for P * yields
P * = Amount borrowed / Number of shares 1 Maintenance margin
Finally, setting the maintenance margin equal to 40 percent, we obtain this critical price, P *:
P * = $6,600 /300 1 .40
=$6,600 / 180
=$36.67
At any price below $36.67, your margin will be less than 40 percent, and you will be subject to a margin call. So, $36.67 is the lowest possible price that could be reached before you are subject to a margin call.