Customer Accounts - Stock Price Changes and Margin Requirements

Effect on Margin Account from a Stock Appreciation
Returning to the example, say the UVW stock appreciated and closed yesterday at $50:

$5000 Long Market Value
($2000) Debit Balance
$3000 Credit Balance

As illustrated above, the long market value changes, but it is the equity alone - not the loan value - that changes with it. The brokerage is acting strictly as a lender here and does not stand to gain if the stock price goes up, nor will it lose if the price goes down.

As a result, your client now has excess equity, defined as the total value of cash and securities in a margin account, less margin debt:

$5000 Long Market Value
($2000) Debit Balance
$3000 Credit Balance
($2500) Reg T Requirement
$500 Excess Equity

Your client can withdraw this excess equity, leave it in the account to increase buying power, or use it immediately to buy more securities. The buying power of deposited securities, then, is $1,000 ($500 excess equity divided by Reg T's 50% margin requirement). That is, your client can buy $1,000 in that account without triggering a restriction under Reg T.

Effect on Margin Account from a Stock Depreciation
Let's see what would happen if the stock declined by $10 per share instead

$3000 Long Market Value
($2000) Debit Balance
$1000 Credit Balance
($1500) Reg T Requirement
($500) Excess Equity

In this instance, the account would be restricted, meaning the debit balance exceeds Reg T requirements. Reg T does not mandate that your client make a cash deposit in this event; however, it does require him to deposit at least 50% of the purchase price of any more securities he would like to buy. In fact, the 50% margin requirement is an initial requirement - the maintenance requirement is 25% - so the portfolio would have to decline by half before a margin call would be made.

Purchasing Additional Shares On Margin
Related Articles
  1. Professionals

    5 Reasons Financial Advisors Still Choose Mutual Funds

    Take a look at five primary reasons why financial advisors still choose to recommend mutual funds over other types of investment vehicles.
  2. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  3. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  4. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  5. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  6. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  7. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  8. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  9. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
  10. Professionals

    Series 6

    FINRA Series 6 Exam Guide
  1. No results found.
  1. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center