Now that you have the background to understand how margin accounts work, it is time to focus on buying power for normal equities.

Long Market Value
The long market value of a margin account is the total market value of all securities currently held, as of the close of the previous business day.

Example:
Let's say your new client just opened a margin account and now wants to buy 100 shares of UVW at $40 per share. It would cost $4,000, but, assuming the margin requirement is 50%, your client would have to infuse $2,000 in cash. The difference, which is known as the loan value, would be loaned - with interest - by the broker-dealer. Once the cash is deposited and the trade is made, the account is said to have a long market value of $4,000, comprised of $2,000 on loan from the broker, or debit balance, and $2,000 equity, or credit balance. The equity will always be the difference of the market value less the debit:


$ 4000 long market value
$ (2000) debit balance
$ 2000 credit balance


Hypothecation Process

Through the process of hypothecation, the securities become collateral for that loan, and if the account goes into default, the brokerage can sell them to pay back the obligation. To make this easier, securities in margin accounts are nominally the property of the brokerage and are traded in street name, that is, in the brokerage's name.

Broker-dealers are in the business of trading and, perhaps, advising on trades - not lending money. Banks do that, and the brokerage frequently will rehypothecate the shares to a bank to secure the actual loan. The bank can require a pledge of up to 140% of the debit balance, which would drive down the amount of equity in the margin account.

The Series 7 exam will probably not deal with this kind of scenario, so let's just assume in our example that the brokerage's bank requires hypothecation of just 100% of the debit balance, leaving equity in the account unaffected. Let's also hold interest at 0% just to keep the math clear.



Stock Price Changes and Margin Requirements

Related Articles
  1. Markets

    Margin Trading: The Dreaded Margin Call

    In the previous section, we discussed the two restrictions imposed on the amount you can borrow. First, the initial margin, which is the initial amount you can borrow. Second, the maintenance ...
  2. Financial Advisor

    Margin Investing Gets A Bad Rap, But For The Thrill-Seeker, It's Worth It

    Investing on margin can be profitable but it's a risky play that needs care.
  3. Trading

    Intermediate Guide To E-Mini Futures Contracts - Margin

    Margin is essentially a loan that a brokerage firm extends to a client (the trader or investor) that is used for the purchase of trading instruments. Margin trading allows traders and investors ...
  4. Trading

    Buying on Margin

    When an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
  5. Trading

    Margin Trading: Conclusion

    Here's the bottom line on margin trading: You are more likely to lose lots of money (or make lots of money) when you invest on margin. Now let's recap other key points in this tutorial: ...
  6. Markets

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  7. Trading

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  8. Managing Wealth

    What's a Brokerage Account?

    A brokerage account is a contractual arrangement between an investor and a licensed securities broker or brokerage.
  9. Personal Finance

    What is an Account Balance?

    An account balance represents the total amount of money in a financial account at any given moment.
  10. ETFs & Mutual Funds

    Spreading The Word About Portfolio Margin

    An underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
Trading Center