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> Hypothetical example: I own 100 shares of a stock that is currently
> trading at $50 a share.
>
> 1. How much money is the most I can borrow on margin using this
> stock as collateral?
You have $5,000 in equity. You can borrow 50% against common stock,
i.e. $2,500
> 2. What price would the stock have to drop to for me to get a margin
> call?
The maintenance value for stock is 30%. If your equity drops
below 30% you'll need to add money.
% Equity = (Value of Stock - Loan Amount) / Value of Stock
% Equity = 30% if 0.7 * Value of Stock = 2,500 = ~3571$, or 35 3/4
> 3. a) If a margin call occurs, how much money would I have to put up?
That's gonna depend on how much the stock dropped in price.
> b) What happens if I don't pay the additional money?
They will sell some or all of your stock to pay off the loan.
> c) If the stock rises to the price it was when I first borrowed
> against it can I get the additional money back?
Assuming you met the margin call, if the stock returns back to $5,000
and your loan amount is now less than $2,500 you'll be able to borrow
up to the 50% limit.
> 4. Do I have to pay back the interest on the loan periodically, or
> is principal and interest all due when the loan is repaid in full?
As long as you have a sufficient percentage in equity, you can hold
the loan (and accumulate interest) without making payments.
> 5. As the interest accumulates, is it added to the amount borrowed
> in determining when a margin call would occur?
Yes.
> 6. Are there any restrictions on how the borrowed money can be used?
No.
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| You deduct it on Schedule A. It is "Investment Interest Expense", and
has some limitations:
(1) Take your total "Investment Income". (Savings interest, capital
gains on investments, dividends, etc)
(2) Subtract any deductible "miscellaneous investment expenses" that
you have on your schedule A. (You may not have any, as they are
subject to the 2% limitation.)
(3) The difference is the limit on the amount of "Investment Interest
Expense" you can take.
If you don't use it all, you carry it forward to the next year. There
is a special form to do this, a 4952 (I think).
Beware that you have to "give" the deduction back for AMT calculations.
SteveSov
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