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

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