SMF - How do share margin financing work and how to calculate

Hi Reader, 

You refer to the earlier post to have better understanding about Share margin financing (SMF.
This post will show you the calculation of SMF

Margin Multiplier

There is a multiplier on the value of the pledged collateral which defines the maximum financing amount.

Eg. There is 2.5x financing for pledged FD, thus by pledging RM100k FD, investor will get RM250k trading limit.

 

Margin of Finance (MOF)

Margin of Finance = (Total Outstanding - FD amount) / Total share value*

Let say, the approved MOF is 60%, with RM100K pledge FD, you can purchase a shares at RM250K

 MOF = (RM250K-RM100K)/RM250K
          =  60%

 

Scenario 1 - Total Share Value increase to RM300k

MOF will reduce to 50% which means investor can afford to purchase more shares as long as maintains within the approved MOF of 60%.

MOF = (RM250K-RM100K)/RM300K

          =  50%

 

Scenario 2 - Total Share Value decrease to RM200k

MOF will increase to 75% which triggers a margin call. Investor will have to top up cash or sell some shares to bring the MOF back to 60% to avoid force selling action by bank

 MOF = (RM250K-RM100K)/RM200K

          =  75%

If you are interested to know more about SMF , don’t hesitate to fix an appointment with us. We’ll get back to you asap.😀

Thank you.