Series 7

AAA

Customer Accounts - Purchasing Additional Shares On Margin

Let's say the investor wants to buy $4,000 of RST stock. He must put in at least $2,000 in cash:

$7,000 Long Market Value
($4,000) Debit Balance
$3,000 Credit Balance
($3,500) Reg T Requirement
($500) Excess Equity


The long market value went up by the $4,000 price of the stock acquired to $7,000. The debit balance grew $2,000 to $4,000, as did the credit balance (increasing to $3,000). This resulted in no change for excess equity: which remains negative, and the account is still under restriction. Reg T requirement changed in absolute terms, but it remains a consistent 50% of market value.

Your client would need to deposit $500 in cash - add that to the credit balance - to bring the margin back to 50%. Another way to do the same thing would be to add $1,000 in securities. So if he added $1,000 worth of OPQ shares:

$8,000 Long Market Value
($4,000) Debit Balance
$4,000 Credit Balance
($4,000) Reg T Requirement
- Excess Equity


Now let's say his shares decline by $1,000. You will see that the debit balance does not change:

$7,000 Long Market Value
($4,000) Debit Balance
$3,000 Credit Balance
($3,500) Reg T Requirement
($500) Excess Equity


Let's say the investor now sells $2,000 worth of securities:

$5,000 Long Market Value
($3,000) Debit Balance
$2,000 Credit Balance
($2,500) Reg T Requirement
($500) Excess Equity


You can see $1,000 is deducted from the debit, but another $1,000 is erased from equity. Where did that $2,000 go?

They went straight into the investor's pocket in the form of a cash withdrawal.

Alternately, he could have left the money in the account, in which case both debit and equity would change by the full $2,000:

$5,000 Long Market Value
($2,000) Debit Balance
$3,000 Credit Balance
($2,500) Reg T Requirement
$500 Excess Equity


This returns your client to excess equity and takes restrictions off the account. If he wants to buy another $1,000 in securities, he need not make a cash deposit.

Special Memorandum Account
comments powered by Disqus
Related Articles
  1. Confirming Price Movements With Volume ...
    Active Trading Fundamentals

    Confirming Price Movements With Volume ...

  2. Essential Strategies For Trading Volume
    Active Trading

    Essential Strategies For Trading Volume

  3. 5 Top Traded Stocks
    Investing Basics

    5 Top Traded Stocks

  4. How To Choose Stocks For Day Trading
    Investing Basics

    How To Choose Stocks For Day Trading

  5. What To Expect During Friday's Facebook ...
    Investing News

    What To Expect During Friday's Facebook ...

Trading Center