Question of the Week

Use the following information about a customer’s margin account to answer the question.

ABC stock – 200 shares. CMV $40/share
PDQ stock – 100 shares. CMV $30/share
LIB stock – 100 shares. CMV $50/ share
Debit balance -- $6,400

If this customer used any SMA in the account to its maximum by purchasing stock, the DR balance in the account would be:

a) $12,800
b) $9,600
c) $8,000
d) $3,200


The correct answer is b.

Any time an investor uses SMA, he/she is borrowing money from the broker-dealer and increasing the DR balance. SMA has a purchasing power equaling the SMA x 2 ($1,600 x 2 = $3,200). The broker-dealer will loan the client an additional $3,200 to purchase stock. Add this to the existing DR balance of $6,400 + $3,200 = $9,600.