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Series 7 practice questionhardMargin Accounts — Margin Call Scenario

A client purchases 1,000 shares of XYZ stock at $80 per share in a margin account, depositing the Reg T required initial margin. The stock price subsequently falls to $50 per share. What is the client's equity in the account?

  1. A$10,000✓ Correct answer
  2. B$50,000
  3. C$40,000
  4. D$30,000
Explanation

Why A — $10,000

The client purchased $80,000 worth of stock (1,000 shares x $80) and deposited 50% ($40,000) as initial margin, borrowing $40,000 from the broker. When the stock drops to $50 per share, the market value is $50,000 (1,000 x $50). Equity equals market value minus the debit balance: $50,000 - $40,000 = $10,000. The equity percentage is now $10,000 / $50,000 = 20%, which is below the 25% FINRA maintenance requirement, triggering a margin call.

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