What Is a Debit Balance in a Margin Account?

What Is a Debit Balance?

The debit balance in a margin account is the total amount of money owed by the customer to a broker or other lender for funds borrowed to purchase securities. The debit balance is the amount of cash the customer must have in the account following the execution of a security purchase order so that the transaction can be settled properly.

Key Takeaways

  • The debit balance in a margin account is the total owed by a customer to a broker for funds borrowed to purchase securities.
  • There are two types of trading accounts: a cash account and a margin account.
  • A cash account only uses the cash available to purchase securities, while a margin account uses borrowed money from the broker to purchase securities.
  • The amount borrowed in the margin account is the debit balance.
  • Borrowing on margin is also known as being leveraged.
  • An adjusted debit balance is the debit balance minus the profits from short sales in the account.

Understanding a Debit Balance

When buying on margin, investors borrow funds from a broker and then combine those funds with their own in order to purchase a greater number of shares and, hopefully, earn a greater profit. This is known as leveraging their position.

The two primary types of investment accounts used to buy and sell financial assets are a cash account and a margin account. In a cash account, an investor can only spend the cash balance on deposit and no more. For example, if the trader only has $1,000 in their cash account, they can only buy securities worth a total value of $1,000.

A margin account 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, their broker can lend them the $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.

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.

Adjusted Debit Balance

A margin account might have both long and short margin positions. 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 memorandum account (SMA).

In a margin account, the brokerage customer can borrow funds from the brokerage firm to purchase securities and pledge cash or securities already in the margin account as collateral. The adjusted debit balance informs the investor how much would be owed to the broker in the event of a margin call, which requires repayment of the borrowed funds to the brokerage firm.

Industry regulations permit an investor to borrow up to 50% of the purchase price of securities on margin, which is stipulated in Regulation T.