Unit 6- Margin Accounts Flashcards
Long Margin Account
BORROW MONEY: purchase securities and pay interest on money borrowed until the loan is repaid
Short Margin Account
BORROW SECURITIES: stock is borrowed and then sold short, enabling customer to profit if stock value declines
If purchase 100 shares at $20 with 50% on margin and the stock rises to $30, what is your return?
$10,000 = your initial investment ($10,000 borrowed), and the investment increased by $10,000. Therefore (10,000/10,000 = 1). The investment grew by 100%.
Credit Agreement
terms of loan and interest, etc..
Hypothecation Agreement
gives broker permission to treat margin securities as collatoral
Loan Consent Agreement
OPTIONAL for customer to sign
- permission for broker/dealer to loan margin securities to other customers for short sales
Regulation T
Act of 1934
- customers must deposit a minimum of 50% of the market value of the transaction within 5 business days
- also determines which securities can be used at collateral for loans and which can be purchased on margin
MARGIN
amount of equity that must be deposited to buy securities in a margin acount
MARGINABLE
the securities that can be used as collateral in a margin acount
PUTS & CALLs
Rights
Non-Nasdaq OTC issues not approved by FRB
Insurance Contracts
CAN/CANNOT be purchased on margin?
CAN/CANNOT be used as collatoral?
CANNOT/CANNOT
Mutual Funds
New Issues
CAN/CANNOT be purchased on margin?
CAN/CANNOT be used as collatoral?
CANNOT/
CAN after 30 days
Exchange Listed STocks and Bonds
Nasdaq Stocks
Non-Nasdaq OTC issues approved by FRB
Warrants
CAN/CANNOT be purchased on margin?
CAN/CANNOT be used as collatoral?
CAN/CAN
What are the only type of options that can be purchased on margin?
LEAPS options with more than nine months to expiration, requirement is 75%
A customer purchases 100 ABC at 62 and also writes a ABC 65 call at 3. What is the margin deposit?
50% of the Stock purchase ($3,100) MINUS the call premium ($300) = $2,800
REQUIRED DEPOSIT IN Margin ACCOUNT
= 50% of Position VALUE - Call Premium Earned
REQUIRED DEPOSIT IN CASH ACCOUNT
= 100% of POSITION VALUE - Call Premium Earned
A customer purchases 100 ABC at 62 and also buys a ABC 65 call at 3. What is the margin deposit?
$3100 + $300 = $3400
If debt spread on margin, required to deposit maximum loss, which is?
Net Debt
If credit spread on margin, require to deposit maximum loss, which is?
Difference in Strike Prices - net credit
Initial Deposits in margin account must be greater than?
What is the exception?
$2000
* If initial purchase is less than 2,000, than initial deposit equals 100% of the investment (DOES NOT APPLY FOR SHORT MARGIN)
How many days after trade date must customer meet margin requirements?
5 business days
Freeriding
When securities are purchased and then sold before making payment for the purchase
Long Market Value (LMV)
the current market value of stock position
Debit Register (DR)
amount of money borrowed by the customer
Equity (EQ)
customer’s net worth in the margin account
portion fully owned by the customer
FINRA requires what % of long market value in long margin account for minimum maintenance? Regulation T requires?
25%, 50%
Restricted Account when:
equity is less than Regulation T (50%) but more than minimum maintenance of 25%
SMA (Special Memorandum Account)
Excess Equity
EQ-Regulation T required
How many days does customer have to remove cash dividends from margin account?
30 days
Retention Requirement (if restricted)
If selling securities, at least 50% of the proceeds are credited to SMA of a restricted account
If securities are sold in a restricted account, which are affected? LMV/DR/EQ/SMA
LMV, DR, and SMA
**EQ is only impacted if customer elects to remove proceeds
If shorting stock below $5, what is the initial deposit?
2000 or $2.5/ share, whichever is greater
FINRA minimum maintenance on shorts (%) ?
30%
