To illustrate the leverage impact, assume that the stock in Example 5‐3 goes up 20 percent from $90 to $108, for a gain of $18 × 100 shares, or $1,800. The investor has a $1,800/$4,500 = 40 percent gain on his or her equity, the actual cash put up by the investor. On the other hand, if the stock goes down 6 percent to $84.60, a loss of $540, the investor has a $540/$4,500 = 12 percent loss on his or her equity.

Example 5‐3

If the initial margin requirement is 50 percent on a $9,000 transaction (100 shares at $90 per share), an investor who wants to fully use the margin provision must contribute $4,500, borrowing $4,500 from the broker.19 The investor could contribute $4,500 in cash or deposit $9,000 in marginable securities.