David Waring

In our last lesson we continued our discussion of how to trade stocks on margin, with a look at the difference between initial and maintenance margin. In today's lesson we are going to finish up our discussion of margin, with a look at how to calculate margin on the ThinkorSwim platform.

To make the math a little easier on us here, instead of logging into my Paper Trading account I have taken screenshots for us to work off of. The reason I say this will make the math a little easier for us is because this will keep the market fluctuations from changing our numbers as we go through the math of calculating affects on buying power. For those of you who would like to practice placing some margin trades on the ThinkorSwim platform I have included a link where you can register for a free paper trading account above this video if you have not done so already.

Ok, so the first example we are going to look at is trading a long position on margin. For this example as you can see in the screenshot displaying now, I am long 450 shares of Google which had a current market price of 337 when I took this screenshot. This means that the dollar value of this position as displayed on the platform is $151,650.

As you can also see on the platform, the cash balance of my account is 98,954.75. So it is obvious here that without the use of margin, I would not have been able to purchase this position. Next lets take a look at how the math flows through my account here. As we learned about in our earlier lessons I am required to put up at least 50% of the purchase price of the stock when trading on margin, to initiate a new position. As this position cost me $151,650 this means that I am required to put up at least half that amount which comes out to $75,825. Now normally on the ThinkorSwim platform I would be required to have only 30% of the current market price as my maintenance margin as they require a small amount higher in maintenance margin than is required by regulations. Because of the recent market volatility the stocks that I am using in this example are required to be carried at 50% maintenance margin as well, which leaves me with the cash balance of my account (98,954.75) - my maintenance margin requirement ($75,825) or $23,129.75 in cash available to take new positions which is left in my account.

All of this information shows up in the accounts tab of the ThinkorSwim platform, and fluctuates with the market in real time. So basically here as long as my buying power remains above zero, then I can initiate new positions and I do not have to put up additional funds or sell securities to meet a margin call.

Next lets take a look at a short stock example. The first thing to understand about shorting stocks, is that a margin account is required to do so, because in a short sale you are borrowing stock from someone else and selling it in the open market. The second thing that it is important to understand, is that when you sell a stock short, the proceeds from the short sale are deposited into your account which increases your cash balance. Because of this the margin requirement for short selling is 150% initial margin, and 130% maintenance margin on the ThinkorSwim platform under normal market conditions.

Because the short sale increases the cash in your account by 100% of the sale price of the stock however, the amount of a traders account that he or she must put up in cash remains 50% initiation and 30% maintenance just as in the long stock example. For our short sale example I am going to sell 5000 shares of Microsoft stock which at the time I took this screenshot had a market price of 21.22. As shown on the platform this makes the dollar value of this position $106,100. Since I sold this stock short the $106,100 proceeds from the sale are deposited into my account bringing the balance of the account to the cash amount of 97,105.50 plus 106,100 which equals $203,205.50. Because of recent market volatility both the initial and maintenance margin are 150% for this stock, which equals 106,100 * 1.5 or $159,150. To get the cash amount available to initiate new positions I simple subtract $159,150 from the $203,205.50 balance of my account which gives me $44,055.50.

That's our lesson for today and that wraps up our series of lesson on trading stocks on margin. In our next lesson we will wrap up our module on the rules and regulations surrounding trading stocks, with a look at something which is known as the pattern day trading rule, so I hope to see you then. As always if there are any questions or comments please leave them in the comments section below, and good luck with your trading!

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

daytraitor

Hi, first thanks for all the great videos. Every time I google something, you come up. Second, I have watched this and the pattern daytrading rule video but am not quite sure how they affect forex. Does the pattern daytrader rule even apply to forex? How much cash would I need to open an account to have $25,000 buying power, for example with thinkorswim (assuming I was trading only forex)?

Tekmnd

Hi daytraitor

The PTD rule does not apply to forex.

You could trade $25,000 worth of currency with as little as $65, but you probably would lose it all in the first couple of minutes.
To take $25,000 worth of currency and follow proper money mangement, the amount you would need will vary depending on if you trade short term or long term.

My personal view is that you would need $5k to $13K to do it properly (this means you would be trading on between 2:1 and 5:1 leverge).

Cheers
Tek

Unregistered

Great, thank you much for the quick and helpful response.

I wasn't so much looking to get into $25,000 trades as I was curious how much money it would take to fulfill the pattern daytrader requirement, but fortunately I don't have to at all.

I would love to open an account with $5000; unfortunately that is not within my means at this time so I plan $2000, and do very small (1 mini-lot) trades. While not ideal, I hope it is not unreasonable.

Tekmnd

Hi

For $2000, you might consider a micro account instead of a mini account. The lot size is 1/10th the size of a mini, so it would give you a lot of flexibility.

Cheers
Tek