Margin Flashcards
Long account equation
Current mkt value - debit balance = equity
CMV - DR = EQ
DR - amount loaned to customer
Reg T
Determines the amount of EQ investor must deposit to pay for a security trade in a margin account
Usually 50%
Options are not marginable, must deposit full premium
Difference between margin call and DR
Margin call is the equity or reserve requirement for margin whereas the DR represents the other side of reg t, the amount borrowed
Impact of upward stock price movement on DR
None, you still borrowed the same amount
It’s the EQ that moves up
SMA
Special memo acct
Represents the extra EQ you get when a stock price moves up
The difference btwn the new EQ positions - LESS THE NEW REG T REQUIREMENT OF THE NEW MKT VALUE
Can be withdrawn
Can be used to reduce margin when buying more stock
Can’t lose it till you use it
Cannot be used to lower the DR
SMA buying power
SMA/reg t = buying power
, or the amount of securities the investor could buy w/o sending any more money
Restricted acct
When stock price moves down on margin acct below the reg t requirement
When must maintenance calls be met?
On demand (promptly not immediately) issued at the close of mkt, brokerage determines No extensions are allowed
5 biz days after trade date
Minimum maintenance
Minimum EQ = 25% of CMV
Minimum CMV decline (long)
4 x DR/3
Failure to meet maintenance call
The firm must sell out securities 4 times the amount of the call from the margin acct
Impact of inflows or outflow on margin account
If money comes in DR decreases
If money goes out (or investor owes more money) DR increases
CMV-dr=EQ
Minimum long margin deposit
2k
Or pay for the trade in full
Day trading
When must disclosure stmt be sent?
Prior to the opening of non institutional accts
Requires principal approval
Minimum equity requirement for day traders?
25k
Vs 2k for normal
Nature of margin agreement
Document signed due to additional risk, must be done before any transactions
3 parts
- Credit agreement - sets the terms of the loan
- Hypothecation - b/d loans money to investor for purchase of securities on margin, held in street name
- Loan consent - optional, allows firm to loan securities to a short seller
Short accounts
Margin equation
CMV+EQ=CR
Now the customer is borrowing securities instead of cash
Reg t is still 50%
When CMV value changes CR stays the same, new SMA is the difference between the new EQ and the new reg t
Maintenance requirement for short acct
30% of CMV
Vs 25% for long
Reg U
Using securities as collateral to borrow money from the bank
Reg G
Using securities to borrow money from another financial institution besides b/d or bank
Reg X
Regulates foreign lenders of US investors who trade securities
Overseas lenders are still subject to Reg’s T U or G
Margin required for options
100%
Options must be paid for in full
Maximum CMV increase (short)
10xCR/13
What can be used as collateral in a margin account
Bonds stocks mf
Not options
