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. Investing

    What Does Debit Mean?

    Debit is an accounting term used to refer to the left side of an accounting journal entry. Each debit must be offset by an equal credit entry.
  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. Investing

    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 ...
  4. Financial Advisor

    Understanding the Maintenance Margin

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

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  6. Trading

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  7. Investing

    What's a Brokerage Account?

    A brokerage account is a contractual arrangement between an investor and a licensed securities broker or brokerage.
  8. Investing

    Explaining Initial Margin

    Initial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
  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.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center