Let me try to help explain.
Suppose we are talking about the 1:5 margin requirement. So the Blocked funds amount is initially 1/5 the value of the opening value of the stock. As the value of your shares rises or falls the Blocked funds amount must also rise or fall by one-fifth the amount. If shares are up 5%, then Blocked funds go up 1%. This has to happen, otherwise the margin indicator value would change simply by closing the position and reopening an identical one (ignoring effect of spread). That would be illogical.
And apart from that now I see they two different formula to calculate the margin, I mean this isn‘t right! 212 is playing unfair!
You are right. There are two formula.
- If Total funds > Blocked funds, margin indicator is
100% [Total funds]/([Total funds]+[Blocked funds])
- If Total funds < Blocked funds, margin indicator is
50% [Total funds]/[Blocked funds]
There has to be a change of formula, since neither would be ideal over a full range of values.
Suppose we deposit 120 and use 100 of it to take a position in shares worth 500. In the graph below, the orange line is formula 1 and blue one is 2. The X-axis shows change in value of our 500 of stock, from down 120 (-24%) to up 300 (+60%). Notice that we use the lower of the two lines as the margin indicator value.
We cannot use blue line (formula 2) the whole way since this exceeds 100% at the right. Using blue to the left of the point where [Blocked funds] = [Total funds] provides the user with more protection and an indicator that moves in a more linear way.
The idea of using more that one formula that match at a point is not unusual. The UK tax code has at least 5 such joins.
