Margin Account Basics Chapter 9 Flashcards
Regulation T
deposit required is generally 50 % of the purchase price.
The other 50% which the broker-dealer lends to the customer is the Loan Value of the margin account.
For example, if I wanted to by $5,000 worth of stock. So I would have to put $2,500 into the margin account and the broker-dealer would put the other $2,500 to equal $5,000.
SMA
Special Memorandum Account- is a line of credit extended to the customer by the broker-dealer.
Under Reg T, payment must be received by
4th business day after trade date.
Initial Requirements: Margin accounts Long
- 50% deposit , customers must deposit 50% of the purchase price or $2,000 whichever is greater.
- EXCEPTION: if the full purchase cost is less than $2,000, the customer has to deposit the full amount of the purchase.
$0-$2,000- customer just pays the amount of the securities
$2,000-$4,000 – customer deposits the minimum of $2,000
$4,000 or more- customer deposits 50% of the margin account.
Requirements: Margin accounts SHORT
- Minimum equity- to open a short is $2,000
- Deposit
Basics of a Margin Account Long
Equity in a margin account represents the part of the account that the customer actually owns, it is the customers net financial ownership in the account.
Current Market Value - Debit Balance= Equity
Determining the condition of a long margin
- Look at the market value of the stock
- Cut it half. ( figuring out Reg T)
- Then compare that to the debit balance in the account
ORIGINAL PURCHASE long merging account
$20,000 Market Value
-$10,000 Debit Balance
$10,000 Equity
Step 2. 20,000/2= 10,000 ( step 2)
10,000- 10,000= 0 10,000( debit balance)
So Reg T is 0
Market Value went up
40,000 MV
-10,000 DB
30,000 EQ
40,000/2= 20,000
20,000-10,000 = 10,000
Reg T 10,000 ( excess equity)
Market Value went down
18,000 MV
-10,000 DB
8,000 EQ
18,000/2= 9,000
9,000-10,000= -1,000 ( account in restriction)
Who determines Reg T
Fed reserve
60,000 MV 50,000 MV 40,000 MV
-25,000 DB -30,000 DB -20,000 DB
35,000 EQ 20,000 EQ 20,000 EQ
Solution Steps
60,000/2= 30,000 50,000/2= 25,000 40,000
30,000-25,000= $5,000 25,000-30,000= - 5,000 -20,000
Excess EQ of 5,000 Restricted by 5,000. 20,000. At Reg T
SMA
is nothing more than a ledger recording of money which was available to the customer but was not used. SMA is like a “line of credit”
NOTE: SMA is not depleted by a decline in the market value of securities in the account.
SMA is not increased by stock dividends.
Buying power from SMA / special memorandum account
When an account has an SMA, the buying power = 2 x SMA
NOTE: Investors are not permitted to use SMA if the SMA will put them into minimum maintenance
Buying power from Excess Equity:
When an account has excess equity and no SMA figure is presented, the buying power= 2 x excess equity
Buying power from an account at Reg T
When an account is at reg T,( 50/50) and there is only an apperception of the market value of the securities in the account, the buying power will be equal to the amount of apperception.
Restricted Margin Account- Long
A long margin account is restricted when the debit balance is more than half of the market value of the securities. When the account is restricted, the customer may still trade securities in the account but must abide by specific rules.
NOTE: once you determine the account is restricted, work with only the trades that occur that day. DO NOT recalculate the entire account
