Question

If we buy stock worth $1 million, and the initial margin requirements are 50%, while the maintenance margin requirement is 30%, what happens if the stock value drops by 45%?

Answer 1

You invested own money = $1m x 50% = $0.5m

You borrowed = $0.5m

If the value of total investment drops by 45%, value of investment = $1m x (1 - 45%) = $0.55m

Value of your own money = Investment - Loan = $0.55 - $0.5 = $0.05

Hence, you lost (0.5 - 0.05) / 0.5 = 90% of your own money if the stock value drops by 45%.

However, as the maintenance margin is 30%, you would get a call from your broker much earlier to deposit more money to ensure that the margin is 30%.