I’m not sure if I completely understand the stock drawdown calculation part—so I tried to walkthrough your example in reverse.
Starting with the $350,000 portfolio, you borrow $200,000 and reinvest that amount into the same equity. So when the equity declines by ~18%, you are left with $451,000. Since you still owe $200,000 my understanding is that the maintenance margin calculation would be as follows:
$251,000 / $451,000 = 56% > 15%
Therefore, no margin call occurs.
Since I’m still new to this I’m sure I have a logical blunder embedded somewhere. Could you correct my misunderstanding?
Your scenario seems totally different from the one described in the post. You’re keeping the $200K loan in your brokerage account (not withdrawing it) and plowing it back into the risk asset (not a risk-free CD); then imagining only an 18% decline (not 28%).
OP’s liquidation scenario occurs with a $200K liability against $252K equity in the brokerage account (following the 28% decline from the original $350K). The brokerage let OP withdraw the $200K, but then can’t assume he still has it.
I’m not sure if I completely understand the stock drawdown calculation part—so I tried to walkthrough your example in reverse.
Starting with the $350,000 portfolio, you borrow $200,000 and reinvest that amount into the same equity. So when the equity declines by ~18%, you are left with $451,000. Since you still owe $200,000 my understanding is that the maintenance margin calculation would be as follows:
$251,000 / $451,000 = 56% > 15%
Therefore, no margin call occurs.
Since I’m still new to this I’m sure I have a logical blunder embedded somewhere. Could you correct my misunderstanding?
Your scenario seems totally different from the one described in the post. You’re keeping the $200K loan in your brokerage account (not withdrawing it) and plowing it back into the risk asset (not a risk-free CD); then imagining only an 18% decline (not 28%).
OP’s liquidation scenario occurs with a $200K liability against $252K equity in the brokerage account (following the 28% decline from the original $350K). The brokerage let OP withdraw the $200K, but then can’t assume he still has it.