Question

Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest rate...

Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest rate on margin loan will be 8% annually. Kenanga securities has set margin requirement of 70% and investor has to maintain the margin above 50% or otherwise there might be a margin call. Currently the market price of stock for WMF is RM3.50 and Mrs Hanim decided to buy 20 lots of them. The company had given out dividend RM0.50 per share a year before stock issuance. The commission fees, stamp duty and clearing fees totaled to 1.5% of the transaction value.

What is the rate of return on her investment after holding a year and decided to sell it as the stock price goes to RM8.00 per share.

Homework Answers

Answer #1

For stocks, the typical lot size is 100 shares.

Price of Stock (RM) 3.5
No. of shares 2000
Market Value of equity (RM) 7000
Margin requirement 70%
Own funds (RM) 4900
Loan amount (RM) 2100

GAINS FROM THE TRADE

If the share price rises to RM8.00 after one year, then the value of the stock increases to RM16,000.

Capital gains = (16,000 - 4,900) = RM 11,100

Dividend received = RM 0.50*2000 = RM 1,000

EXPENSES FROM THE TRADE

By the end of the year, the amount of the loan owed to the broker grows to: Principal * (1 + Interest rate) = RM2,100 * (1 + 0.08) = RM2,268

Transaction fees = 1.50%*trade value = 1.50%*RM 7000 = RM 105

Net gain = 11,100 + 1,000 - 2,268 - 105 = RM 9,727

Rate of return on investment = Net gain/Invested own funds = RM 9,727 / RM 4,900 - 1 = 98.51%

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