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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