Margin Call Question... investor, question, equation, guess

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Using the equation to find the margin call price:

[(P)*(1 - Margin %)] / (1 - maintenance margin %)

Why do I plug in .555 for the margin % instead of .444 when the data is:

An investor opens a margin account with an initial deposit of $5,000. He then
purchases 300 shares of a stock at $30. His margin account has a maintenance
margin requirement of 30%.

I guess my question is: Why is the margin % 5000/9000 rather than 4000/9000??



Edited 5 time(s). Last edit at Friday, December 3, 2010 at 04:48PM by mnieman.

dotamasta

I don't know what others do, but I equate the following values. I hate to remember long equations like the one above which I can derive logically in 15 seconds.

Lets say current stock price is x where he gets a margin call

300x - 4000 = .30 x 300x

(4000 is the money that investor borrowed, so his equity today is 300 x - 4000 which is only 30% of the total equity)

pacmandefense

I think I was just confused because of this:

Say a stock is $100 and the margin requirement is 40%, that means you only need to pay $40 of the $100. I had it backwards and thought that the margin only covered $40 (40%) of it so that you had to pay $60.

i think my brains about to die from studying



Edited 1 time(s). Last edit at Friday, December 3, 2010 at 05:06PM by mnieman.