Posted by lae2 on September 28, 2008 at 13:07:13:
Managing margin and the stocks you buy on margin is an art. You want as much leverage as possible but you may not want to realize losses (or gains) to make calls.
Hypothetical case. You have 100,000.00 in margined stock. You are in accumulation mode. You calculate that the worse case scenario would be a pull back of 25% in equity value. How high of equity percentage do you need to avoid getting out your checkbook? The maintenance requirement is apt to be about .33 X 100,000.00 or 33,000. To guard against a call in the presence of a 25% decline in equity value there needs to be 33,000 + 25,000 or 58,000.00 of margin equity.
The equity percentage, then, to protect against a 25 percent drop in equity value is 58/100 X 100 = 58% equity. The equity percentage can be adjusted down in a bull market and in the face of planed capital gains. Use stop triggers to eat away at the equity percentage in a good market but have a plan in place to quickly reestablish at least 50% equity.
Failure to maintain sufficient equity paired with no dry powder and you will be churning your account. This, I know.