How is the maximum loan value of margin stock defined?
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A. B. C. D.C
The maximum loan value of margin stock is defined as the maximum amount of money that an investor can borrow from a broker-dealer to purchase securities on margin. The amount that can be borrowed is subject to certain limits set by the Federal Reserve Board and the broker-dealer's own margin requirements.
The answer to the question is C. The maximum loan value of margin stock is typically defined as a percentage of the current market value of the stock. This percentage is known as the margin requirement or the initial margin requirement. The margin requirement is the amount of equity that an investor must contribute to a margin account before the broker-dealer will extend credit to purchase securities on margin.
For example, if the margin requirement is 50%, an investor must contribute 50% of the value of the securities they wish to purchase on margin, and the broker-dealer will loan the remaining 50%. If the investor's account value falls below the maintenance margin requirement (which is typically lower than the initial margin requirement), they may receive a margin call requiring them to deposit additional funds to bring their account back up to the required level.
It's worth noting that the maximum loan value of margin stock can vary depending on the type of security being purchased, as well as the investor's own financial situation and risk tolerance. In addition, broker-dealers may set their own margin requirements that are more stringent than those set by the Federal Reserve Board. It's important for investors to understand these requirements and to carefully manage their margin accounts to avoid losses and potential margin calls.