Short Ratios Stocks
Short Ratios Stocks
Margin-to-Equity Ratio in stock market
As discussed in detail in Section Two, one of the keys to long-term success in stock market is to develop a portfolio which is “right” for the amount of capital that you have in your account.
If you trade “too small” you forego the opportunity to make money that you could make in stock market. If you trade “too big” you run the risk of experiencing sharp and occasionally
Painful drawdowns in your account equity, which may cause you to stop trading prematurely in stock market. This not only eliminates the opportunity to make money it also eliminates the opportunity to recoup your losses in stock market. If you trade “way too big” for your account size you run the risk of “tapping out.”While the discussion in Section Two was fairly detailed, there is a simple rule-of-thumb measure that can tell you how heavy you have your foot on the gas. This measure is referred to as the margin-to-equity ratio. To calculate this ratio simply adds up the initial margin requirements for all of the positions in your portfolio. Then divide this total by the equity in your trading account to arrive at your margin-to equity ratio. Let’s look at a simple example.
Trader A has a $30,000 trading account and at any point in time may have positions in T-Bonds, Soybeans, Crude Oil and Japanese Yen. Let’s also assume that the initial margin requirements for each market are as follows:
T-Bonds $2700
Soybeans $ 750
Crude Oil $1400
Japanese Yen $2650
If we add up these initial margin requirements we get a total of $7,500. In other words, if this trader were long or short one contract of each of these markets at the same time, his brokerage firm would require him to hold a bare minimum of $7,500 in his account. If we divide $7,500 by the $30,000 that he actually has in his account, we get a ratio of 25%. So this trader’s margin-to-equity ratio is 25%. This value can and will change over time. Clearly, as the equity in his account rises or falls this value will change. Also, margin requirements that are set by the exchanges can and do change from time to time based on the fluctuations of individual markets. Finally, as the number of positions you hold rises, your margin-to-equity ratio rises, and as the number of positions you hold declines, your margin-to-equity ratio declines. The obvious question is “what is the right margin-to-equity ratio to maintain?” If your only goal is to maximize your profitability there seemingly is no reason to limit your margin-to-equity ratio. However, the other side of the coin is risk exposure. While the margin-to-equity ratio does not measure your actual dollar risk, it does give you a quick and easy way to get a handle on the relative level of exposure you have in the market place at any given point in time. In other words, if your margin-to-equity ratio is 10%, clearly you have less exposure than if it were 30%. The ultimate goal is to maximize your profitability while minimizing your exposure to risk. If Investor A and Investor B both make 20% a year, but Investor A uses an average margin-to-equity ratio of 10% while Investor B uses an average margin-to-equity ratio of 30%, clearly Investor A is the more efficient trader as well as the one less likely to run into trouble along the way.
As far as what is the “right” margin-to-equity ratio, for this there is no absolute right or wrong answer. The general rule-of-thumb regarding a prudent maximum margin-to equity ratio is 30%. In other words, most traders would be well advised to maintain a margin-to-equity ratio below 30%. Trading with a margin-to-equity ratio greater than 30% should be considered an “aggressive” approach to trading futures.
US Stock Market Trend Analysis – Nov2010
|
|
07-09 Mazda Mazdaspeed3 Mazdaspeed 3 2.3L Turbo HPS Short ram Air Intake Kit Powder Coated Blue 08 $199.50 HPS short ram intake systems are an economical alternative to our cold air systems and deliver performance, value and ease of installation. HPS short ram intakes are easy to install under the hood and cost less compared to the cold air intake systems. During the development process, we found certain applications respond favorably to shorter inlet lengths over our longer cold air designs. For these… |
|
|
Short Track Racing Trading Paint $3.50 Short Tracks are where future Nascar legends cut their teeth and make their way up the ranks – one collision at a time. Followed avidly by Nascar’s millions of fans there’s a short track in thousands of small towns across the country. Now with STRTP, players can live the true short track racing experience…. |
|
|
Apple Thunderbolt Display MC914LL/A (NEWEST VERSION) $938.00 Product Features 27-inch IPS display with LED backlighting Thunderbolt and MagSafe All-in-One Cable Connectors 2560 x 1440 Resolution; 16:9 Aspect Ratio FaceTime HD camera 3 USB 2.0 ports, Gigabit Ethernet port, FireWire 800 port, Thunderbolt port Processor, Memory, and Motherboard Memory Slots: 4 Ports and Connectivity USB Ports: 3 FireWire Ports: 1 Warranty and Support Amazon.com Returns Policie… |
|
|
The Bible of Options Strategies: The Definitive Guide for Practical Trading Strategies $33.30 “Guy Cohen is the master when it comes to taming the complexities of options. From buying calls and puts to iron butterflies and condors, Guy explains these strategies in a clear and concise manner that options traders of any level can understand. His chapter on options and taxes is especially welcomed (and needed). The Bible of Options Strategies is a straightforward, easy-to-use reference work… |
|
|
The Elements of Cooking: Translating the Chef’s Craft for Every Kitchen $4.47 Amazon Best of the Month November 2007: Inspired by the Strunk and White classic, Michael Ruhlman’s The Elements of Cooking will quickly prove to be an essential culinary reference for both seasoned cooks and novices who might not know gravlax from gremolata. After a thorough “Notes on Cooking,” Ruhlman, a prolific cookbook author and popular blogger, settles in for an opinionated and informative … |
|
|
Trading on Corporate Earnings News: Profiting from Targeted, Short-Term Options Positions $34.99 This is the eBook version of the printed book.Profit from earnings announcements, by taking targeted, short-term option positions explicitly timed to exploit them! Based on rigorous research and huge data sets, this book identifies the specific earnings-announcement trades most likely to yield profits, and teaches how to make these tradesâin plain English, with real examples! Â Trading on… |
