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. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  2. 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.
  3. 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.
  4. 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.
  5. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  6. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  7. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  8. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
  9. Professionals

    Series 6

    FINRA Series 6 Exam Guide
  10. Professionals

    Series 63

    FINRA/NASAA Series 63 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. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!