What Is a Debit Balance
The debt balance, in a margin account, is the amount of money owed by the customer to the broker (or other lender) for funds advanced to purchase securities. The debit balance is the amount of funds the customer must put into his or her margin account, following the successful execution of a security purchase order, in order to properly settle the transaction.
The debit balance can be contrasted with the credit balance. While a long margin position has a debit balance, a margin account with only short positions will show a credit balance. The credit balance is the sum of the proceeds from a short sale and the required margin amount under Regulation T.
Debit Balance Explained
When buying on margin, investors borrow funds from their brokerage and then combine those funds with their own to purchase a greater number of shares than they would have been able to purchase with their own funds. The debit amount recorded by the brokerage in an investor's account represents the cash cost of the transaction to the investor.
There are two primary types of investment accounts used to buy and sell financial assets – a cash account and a margin account. A cash account is a basic trading account in which an investor can only make trades with his available cash balance. If an investor has $1,000 in the account, then he can only purchase shares worth $1,000, inclusive of commission – and no more.
A margin account, however, allows an investor or trader to borrow money from the broker to purchase additional shares, or in the case of a short sale, to borrow shares to sell in the market. An investor with a $1,000 cash balance may want to purchase shares worth $1,800. In this case, his broker can lend him the additional $800 through a margin account.
In this hypothetical case, the debit balance would be $800 since that is the amount owed in the margin account to the broker for funds advanced to purchase securities.
Understanding Adjusted Debit Balance
Sometimes, a trader's margin account has both long and short margin positions. 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. The adjusted debit balance aids the investor in knowing how much he/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.