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.
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
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
InvestingDebit 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.
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MarketsA maintenance margin is the minimum amount of equity that must be kept in a margin account.
TradingFind out what your broker is doing with your securities when you invest on margin.
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Managing WealthA brokerage account is a contractual arrangement between an investor and a licensed securities broker or brokerage.
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Personal FinanceAn account balance represents the total amount of money in a financial account at any given moment.