Important Concepts
Important Concepts about margins and margin ratio
| Concept | What is it? | Ratio for (1:1) clients | Result |
|---|---|---|---|
Initial Margin Ratio | It is the ratio of the client's capital to the total value of the portfolio (including margin) at the time of receiving the margin. | At inception, the ratio is 50% of the total portfolio value. | In case of profit, the client can transfer any profit that exceeds the initial capital |
Maintenance Margin Ratio | Is the ratio of the client's capital to the total value of the portfolio (including margin) that if reached, will lead to the reduction of the client’s buying power. | The maintenance margin begins once the ratio of the client’s capital to the total portfolio value reaches 40%. | The Client’s buying power declines according to the decline proportion of the total value of the portfolio. |
Margin Call Ratio | When the ratio of the client's capital to the total portfolio value falls to 35%. | The maintenance margin begins once the ratio of the client’s capital to the total portfolio value reaches 35%. | The Client’s buying power declines in proportion with the decline in the total value of the portfolio. |
Liquidation Ratio | The liquidation ratio is the ratio in which the client’s capital to the total portfolio value reaches a point where some or all of the client’s positions will be liquidated. | When the ratio of the client's capital to the total portfolio value falls to 30%. | Some or all of the client’s positions are liquidated immediately without referring to the client. |
Equity Ratings
Equity ratings are measure of stocks’ efficiency which are provided as collateral against margin financing. The equity rating declines as the quality of the purchased shares or the intended shares falls; certain stocks aren’t considered for financing.
In addition, investment firms rate all listed shares based on historical performance. Margin clients are able to utilize the margin provided to them based on the rating of each company.
Example:
If the client’s capital is SAR 1 million and he or she receives a margin of SAR 1 million (maximum buying power becomes SAR 2 million), and the client intends to buy a stock with a rating of 60%, the client may use 60% of the maxium buying power to buy the share (SAR 1.2 million). If the client does buy into the stock using the maximum buying power (SAR 1.2 million), he or she will still be able to use the remainder of the buying power (SAR 800 thousand) to buy stocks with 100% rating, use SAR 400 thousand to buy stocks with 80% rating, or a combination of both. It is important to note that the client should use the maximum buying power to buy stocks with 60% rating, he or she will not be able to buy any other stocks with 60% rating or less.
Derayah’s margin clients may view the latest version of Equity Ratings by logging into their portfolios on Derayah’s website