To buy on margin is to borrow money from a broker to purchase stocks. You can think of it as facilities from Al Hekma. It allows you to buy more stocks than you''d be able to normally buy without the need to put upfront the cash.
To trade on margin, you need to open a margin account. This is different from a regular cash account, in which you pay upfront for all the stocks purchased. First, you need to fill and sign the required margin account documentation. After which an initial cash deposit of a minimum of JD 5000 or the equivalent of market value of marginable shares which is called the initial margin.- is required to activate the account.
Once the account is opened and activated, you can start using the margin trading facility. Not all stocks are eligible for margin trading. At the beginning of each year the Securities Commission releases the list of acceptable stocks for margin trading (marginable securities). Investors are allowed to borrow not more than 50% collateral of their contribution.
Marginable securities in the account are considered as collateral for the margin trading facility granted. Interest charges will be applied to your account at prevailing interest levels, subject to the facilities used. Over time, your debt level increases as interest charges accrue against you. Accordingly, it is important to know that buying on margin should be used for short-term investments. When facilities continue for a longer time, you will need higher stock prices to break even.
The maximum amount that the client can buy at a certain time not withstanding the specified parameters.
Let's assume that you deposit JD 10,000 in your margin account and you plan to buy stocks worth of JD 20,000. The JD 20,000 represent your buying power. If you buy JD 5,000 worth of stocks, you will have JD 15,000 remaining in buying power, i.e. your cash is enough to purchase the stocks.
This brings us to an important point: the buying power of a margin account changes daily depending on the price movement of the marginable securities in the account.
The Jordan Securities Commission (JSC) applies specific restrictions on the amounts you can borrow. According to the JSC, you have to deposit an initial margin of 50% and maintain a maintenance margin of at least 30%.
In volatile markets, stock prices can fall very quickly. If the equity (the proportion of your equity to market value) in your account falls below the maintenance margin, Al Hekma will apply a "margin call". A margin call requires you to either liquidate partially your stocks or add more cash to your account or securities, just enough to cover the deficit in the 30% maintenance margin.
If for any reason you do not meet a margin call within 24 hours, Al Hekma is obliged by the JSC to immediately sell just enough securities to bring up the maintenance margin to 30%. This is normally done without giving you any prior notice. For this reason, it is always wise for the client to meet the margin call. Otherwise, the client will not have any control over which stock is sold to cover the margin call.