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Margin Purchases
  • For Margin Transaction
  • Leverage Factor= 1/ Margin percentage
  • Levered Return = HPR* Leverage Factor
Investor purchase 100 shares of a stock for $55 per share. Compute the investor's return if the stock is sold for $75 per share and the transaction was…
  1. 100% financed by investor
  2. A margin purchase with an initial margin requirement of 50%

    As a 100% cash (equity) transaction, the investor would had a return
    =$75,00/$5,500) – 1= 36.36%
With an initial margin of 50%, rest 50% equity in this position would be borrowed from the brokerage firm. If the shares were then sold at $75 per share, the position would be worth $4,750(i.e.7,500 - $2,750). In this situation, the investor would have return =($4,750/$2,750) – 1 
= 72.72%

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