Margin Accounts

Margin Basics

• Margin allows customers to borrow from the broker-dealer using securities as collateral. Customers must sign a margin agreement promptly after account opening and before trading on margin.
• Regulation T, set by the Federal Reserve, establishes the initial requirement for equity securities at 50% of the purchase price. The customer deposits the margin and the broker loans the balance.
• Debit balance is the amount borrowed. Equity in a long margin account = long market value - debit balance.

Long and Short Margin

• Long margin is used to buy more securities than cash alone permits. If market value falls, equity falls and the account can become subject to a maintenance call.
• Short margin involves borrowing securities to sell them. Proceeds are held in the account, and the customer deposits margin. Equity in a short account increases when the stock price falls and decreases when it rises.
• For short accounts, short market value is a liability because the customer must buy back the shares later.

Maintenance and Restrictions

• FINRA minimum maintenance is generally 25% for long accounts, but firms often impose house requirements, frequently 30% or more. Short equity maintenance is typically higher.
• SMA is a line of credit created when the market value rises in a long account; it can be used to buy more securities or withdraw cash, subject to rules.
• Margin magnifies gains and losses and adds interest expense, making it unsuitable for many conservative clients.

Series 7 focus

• Be fluent with basic formulas, maintenance concepts, and the difference between Reg T calls and maintenance calls. The test frequently asks how price changes affect equity and purchasing power.