What Is the Adjusted Debit Balance?

An adjusted debit balance is the amount in a margin account that is owed to the brokerage firm, minus profits on short sales and balances in a special miscellaneous account (SMA). In a margin account, the brokerage customer can borrow funds from the brokerage firm to purchase securities, pledging cash or securities already in the margin account as collateral.

Key Takeaways

  • The adjusted debit balance aids the investor in knowing how much he or she owes in the event of a margin call.
  • Debit balances can be contrasted with credit balances, which are funds owed to a customer's margin account by their broker.

The adjusted debit balance aids the investor in knowing how much he or she owes in the event of a margin call. Under Regulation T, one can borrow up to 50% of the purchase price of securities on margin. The adjusted debit balance is made available to the client regularly, so they are always informed as to how much they owe in the event of a margin call, which requires the investor to pay back the borrowed funds to the brokerage firm.

How Adjusted Debit Balances Work

A debit balance, in general, is what a customer owes their broker (or lender) in terms of maintaining a margin account. The use of trading margin (leverage) in an investment account for the purpose of buying securities amplifies the gains or losses associated with those trades.

To help curtail significant losses experienced by brokerage firms and investors due to unregulated margin trading, Regulation T guidelines were established and are occasionally updated. In 1982, Regulation T guidelines were adjusted to the 50% rule, stating that an investor can borrow up to 50% of the purchase price of a security on margin, and established a formula for computing this.

This formula is still useful in determining the amount of money or securities that one can withdraw from a margin account. For example, things like "free riding," a practice whereby a stock is bought and sold before it has been paid for, is not permitted. If/when free riding occurs, the broker is obligated to freeze the investor's ability to buy on margin for 90 days.

Debit balances can be contrasted with credit balances, which are funds owed to a customer's margin account by their broker.

Adjusting the Margin Account Debit Balance

Sometimes, a trader's margin account has both long and short margin positions. The adjustment allows the trader a quick way to determine where the balance stands.

In a margin account, the brokerage customer can borrow funds from the brokerage firm to purchase securities, pledging cash or securities already in the margin account as collateral. The adjusted debit balance aids the investor in knowing how much he or she owes in the event of a margin call.