Stress Test the Account: A Margin and Leverage Quiz

Margin agreements usually carry a clause to this effect: the firm may sell any securities in your account, without notice, to meet a call. It reads like boilerplate. It decides who picks the sale price. The sums that tell you when that clause wakes up are short enough to do on a phone calculator before you place the order, and each of them turns up somewhere in the questions that follow.

A hypothetical account goes through a fall, a loan, a call and a leverage check. Do each sum yourself first.

The sum that sets the trap

Equity is the positions minus the loan. The loan never shrinks when the stock falls. So every dollar of loss comes out of your equity, and once the equity drops below the maintenance share of the position, the broker can act.

A fall of about a third brings the call. A stricter house requirement, above FINRA’s 25% floor, moves it closer.

How to work the questions

Write down the position, the loan and the equity first. Most wrong choices come from applying a percentage to the wrong base, usually the position when the question is about the equity, which is exactly the mistake leverage punishes, since a loss measured against the whole position always looks smaller than the same dollar loss measured against the money you actually put in.

Interest is the slow leak. It runs every day the loan is open, the stock moving or not, and it comes out of equity the same way a loss does.

When the numbers don’t match

Rework the question in the margin call calculator and compare its lines with your own. The page on the leverage ratio shows how position size and equity combine. The course Borrowed Money Has Teeth goes from the loan and its interest to the forced sale, one lesson at a time, and its lesson on sizing a margin position to survive turns the same sums into a limit you can set before you buy. Then find the part of your own agreement that covers forced sales and read it once.