Understanding Stock Margin Account

  A __margin account__ is a brokerage account that allows traders to purchase securities using borrowed cash. Almost all trading accounts on Stockfuse are margin accounts. In striving to provide the most realistic virtual trading game experience, Stockfuse provides Reg T-compliant margin accounts. Unfortunately, there is a lot of terminology involved and this note should help you understand all the intricacies involved.

For the Impatient
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For readers who are impatient, the two most important numbers you need to understand and monitor are the net liquidation value and the SMA. The __net liquidation value__ reflects your current account value – if you were to liquidate (i.e., close out) every position in your portfolio at the current market price, thus converting every holding into cash, this is the amount you'd have. It is calculated as
$$ \text{Net liquidation value} = \text{cash} + \text{market value of longs} - \text{market value of shorts (absolute value)}. $$
Your daily profits and losses (P&L) and daily [returns](/glossary/investment_return) are computed based on changes in your net liquidation value. For a stock only portfolio, your net liquidation value is also called **equity with loan**.

The exact definition of __SMA__, or the __Special Memorandum Account__, is provided in the next section. The key thing to know is that you should make sure _your SMA is positive at the end of each trading day_. If your SMA is negative at market close, Stockfuse will automatically liquidate some of your holdings to bring it back into the positive zone.

The Nitty-Gritty
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A margin account lets you borrow money to purchase more stocks than otherwise possible. This increases your potential returns (through "leverage"), but also amplifies your potential downside. As a result, there are a number of restrictions in place.

When you initiate a new trade, Stockfuse requires an __initial margin__. The exact initial margin varies from game to game. For [Stockfuse Continuum](/glossary/stockfuse_continuum), the initial margin is 50% of the total market value of the position.

Margins reduce your __available funds__, the amount of capital available for trading, or more specifically:
$$ \text{Available funds} = \text{equity with loan} - \text{initial margin}. $$
Let's assume that you start with $100,000 in your account. You then proceed to purchase $50,000 worth of stock, while selling short $20,000 worth of stock. Your equity with loan is still $100,000: your cash balance becomes \\(100{,}000 - 50{,}000 + 20{,}000 = 70{,}000\\). Therefore, your equity with loan is \\( 70{,}000 + 50{,}000 - 20{,}000 = 100{,}000 \\). The total initial margin is \\( 50{,}000 \times 50\% + 20{,}000\times 50\% = 35{,}000\\). As a result, your available funds has declined to \\(  100{,}000 - 35{,}000 = 65{,}000\\).

Now that your available funds have declined, how much more equity can you purchase? The answer is \\( 65{,}000 \times 2 = 130{,}000\\). If you purchase an additional $130,000 worth of stock, your total margin requirement is \\( (50{,}000+130{,}000)\times50\% + 20{,}000\times50\% = 100{,}000\\), and your available funds is exactly zero. If your purchase more than that, your available funds will drop below zero. Stockfuse will automatically prevent you from trading in such a scenario.

It's clear from the example above that "\\( \text{available funds} \times 2 \\)" represents the max amount of stock you can purchase. This is called your __buying power__.

If you hold these positions to the next trading day, then you must meet the __maintenance margin__. Stockfuse Continuum requires the same 50% for longs and 50% for shorts, making your maintenance margin identical to your initial margin.

Unfortunately, this is not all there is when it comes to margins. In the previous section, we noted the importance of SMA. Here's why. The Federal Reserve's Regulation T requires you to satisfy the __Reg T margin__ at the end of each trading day. The Reg T initial margin is 50% of your stock value, for both longs and shorts. 

Stockfuse calculates your Reg T margin requirement at the end of each trading day; i.e., although throughout the trading day, you only need to satisfy Stockfuse's margin requirement, you _must_ satisfy the Reg T requirement at the end of the day. Since __SMA__ is defined as 
$$ \text{SMA} = \text{equity with loan} - \text{Reg T margin},$$
you need to make sure that your SMA is positive!

A few other numbers printed on your Account Information include the __securities GPV (Gross Position Value)__, which is the total gross value of all your stocks:
$$ \text{Securities GPV} = \text{market value of longs} + \text{market value of shorts}. $$
Finally, your portfolio leverage is defined as the ratio of your securities gross value and your account value:
$$ \text{Leverage} = \text{securities GPV} \div \text{net liquidation value}. $$

Summary
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* \\( \text{Net liquidation value} = \text{cash} + \text{market value of longs} - \text{market value of shorts (absolute value)}\\)
* \\( \text{Equity with loan} = \text{net liquidation value} \\)
* \\( \text{Initial margin} = \text{market value of longs} \times 50\% + \text{market value of shorts} \times 50\% \\)
* \\( \text{Maintenance margin} = \text{initial margin} \\)
* \\( \text{Reg T initial margin} = \text{market value of longs} \times 50\% + \text{market value of shorts} \times 50\% \\)
* \\( \text{Available funds } = \text{equity with loan} - \text{initial margin} \\)
* \\( \text{Buying power} = \text{available funds} \times 2 \\)
* \\( \text{SMA} = \text{equity with loan} - \text{Reg T margin} \\)
* \\( \text{Securities GPV} = \text{market value of longs} + \text{market value of shorts} \\)
* \\( \text{Leverage} = \text{securities GPV} \div \text{net liquidation value} \\)