To put it simply, margin equity is the amount of money that remains in a brokerage margin account. This amount can be in the form of securities or cash. However, a few calculations need to be made in order to calculate margin equity. This is done by subtracting the money borrowed from the broker and the value of in-the-money covered call options sold by the borrower.
Since the margin trade requires borrowing money from a broker, you won’t get it in the form of cash, in most cases. Borrowing money to trade stocks is very attractive to investors since it gives them leverage.
The reason why covered calls need to be subtracted is that any in-the-money option may be exercised by the owner of the call option contract. Therefore, the stock held to cover the call option has a possibility to be removed from the account. This can occur at any time.
Trading Margin Accounts
Margin accounts are basically used for trading but with certain borrowing availability. Basically, the brokerage firm will lend you a portion of the money you need to buy stocks. Since you won’t need to spend all of your cash, making a profit will become a lot easier.
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While this sounds great, there is a limit on the margin account set by the Financial Industry Regulatory Authority. Your margin account has a minimum of $2,000. This is the minimum amount but what the brokerage firms ask is oftentimes higher than $2,000.
The main reason why it is oftentimes higher than $2,000 is when you make a trade that requires you to borrow money, the amount of money you put up is your margin requirement. You can only use your margin equity to meet margin requirements.
With that said, if you want to borrow $3,000, your margin account must have a minimum of $3,000. So you won’t be getting a loan of some sort to invest and the broker secures the money with your margin account.