Marking Leveraged Trading Accounts to Market

Summary

The document explains how to track account value when trading with borrowed funds. It separates cash from share holdings: purchases reduce cash and add shares, while sales increase cash and reduce shares. A negative cash balance represents a margin loan; a negative share position represents a short position.

Account equity is calculated by adding cash to the marked-to-market value of all positions, using current prices and signed share quantities. This means borrowed buying power is not itself account value: the account’s assets and liabilities determine equity. Interest earned on positive cash or charged on a margin balance also changes cash over time. The explanation is a basic accounting framework and does not cover fees, margin requirements, liquidation rules, or other asset types.

Key ideas

• Track cash and each security position separately when using leverage.
• Purchases reduce cash and increase share holdings, while sales have the opposite effects.
• A negative cash balance indicates borrowing, and a negative share quantity indicates a short position.
• Mark-to-market account value is cash plus the value of signed positions at current prices.
• Interest received or paid changes the cash balance and therefore account value.

Tags

# Returns on leveraged account


# Returns on leveraged account












If for example I deposit 10,000 dollars in trading account, and I can buy/sell in 20,000, so I'm using leverage.

How returns are computed? I mean that my balance is consist of 20,000 + sum of returns, so what is actually my account value? 10,000 + sum of returns? Thanks guys.

## Answer by nbbo2 (score 3)

https://quant.stackexchange.com/a/37121

You have to keep track of both your cash and your stock positions

When you start you have 10,000 in cash, and no stock positions (i.e. zero shares of any stock)

When you buy shares you decrease cash by the purchase cost and you record an increase in the number of shares of that stock. If the cash goes negative it means you are "on margin", i.e. have a margin loan.

When you sell shares you increase cash by the sale proceeds and you decrease the number of shares of stock. If the number of shares goes negative, you are now short.

At any time you can find the market to market value of your account as cash plus the inner product of you share holdings times the current market price of your shares (the long share values are being added and the short shares are being subtracted) $MV=C+p_1 s_1 + \cdots +p_n s_n$

Once a month you earn interest on your cash balance or pay interest on your margin balance (negative cash balance), and this increases or decreases cash.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.