Margin Account Basics Chapter 9

Question 1

Regulation T

Answer 1

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.

Question 2

SMA

Answer 2

Special Memorandum Account- is a line of credit extended to the customer by the broker-dealer.

Question 3

Under Reg T, payment must be received by

Answer 3

4th business day after trade date.

Question 4

Initial Requirements: Margin accounts Long

Answer 4

1. 50% deposit , customers must deposit 50% of the purchase price or $2,000 whichever is greater.
2. 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.

Question 5

Requirements: Margin accounts SHORT

Answer 5

1. Minimum equity- to open a short is $2,000
2. Deposit

Question 6

Basics of a Margin Account Long

Answer 6

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

Question 7

Determining the condition of a long margin

Answer 7

1. Look at the market value of the stock
2. Cut it half. ( figuring out Reg T)
3. Then compare that to the debit balance in the account

Question 8

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)

Question 9

Who determines Reg T

Answer 9

Fed reserve

Question 10

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

Answer 10

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

Question 11

SMA

Answer 11

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.

Question 12

Buying power from SMA / special memorandum account

Answer 12

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

Question 13

Buying power from Excess Equity:

Answer 13

When an account has excess equity and no SMA figure is presented, the buying power= 2 x excess equity

Question 14

Buying power from an account at Reg T

Answer 14

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.

Question 15

Restricted Margin Account- Long

Answer 15

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

Question 16

NYSE Minimum Maintenance

Answer 16

States that a customer must maintain 25% of the current market value of securities in the form of equity in the account.

Current Market value x .25%= NYSE minimum equity maintenance requirement

Question 17

A customer has 12,000 in securities and a debit balance of 6,000.
Assuming Reg T is 50%, what would be the NYSE Minimum Maintenance requirement?

Answer 17

12,000 x .25= 3,000. AT Reg T

Question 18

Due on Demand

Answer 18

Maintenance margin calls for additional cash or securities are due on demand or the account will be liquated

Maintenance calls can be satisfied with a deposit of cash equal to the call or a deposit of securities that have a loan value equal to the call

Liquidation securities to satisfy a minimum maintenance call, the firm must liquidate 4 x the amount of the call

Question 19

Basics of a Margin Account- Short

Answer 19

Minimum Initial Deposit – $2,000 no exceptions

Minimum Maintenance
30 % of the current market value short in the form of equity.

Question 20

Determining Equity short

Answer 20

Proceeds of the short sale
+Reg T deposit
Credit Balance
- Current Market Value short
Equity

Question 21

To determine how high the market value of a short stock position could rise before the customer will receive a minimum maintenance call you would take the

Answer 21

Credit Balance / 1.30

Question 22

To determine how low the market value of a long stock position can decline before the account reaches minimum maintenance, the formula is

Answer 22

Debit Balance / .75

Question 23

Mixed Margin Account

Answer 23

(Market Value long- Debit balance)+ (Credit balance- short market value)

Mc D’s Chicken Sandwich
Market Long
Debit Balance

Credit Balance
Short Value

Question 24

Debit Balance in a margin account would be increased if:

Answer 24

Cash withdrawal
Interest charged on the debit balance
Cost of securities purchased on margin

Question 25

Purchasing stock on a WI basis in either a margin or cash account requires a deposit of

Answer 25

25% of the issued cost or 2,000 , whichever is greater.

Question 26

Margin Accounts for Fiduciaries require

Answer 26

written authorization.