margin outline

Long Margin account

·        Customer buys stock and bonds on margin

·        Opening purchase, buy stock first

·        Closing purchase, sell held stock

·        Long market value=debit + eqity

·        Equity-theoretical value

·        Market value goes up, equity goes up

·        Minimum maintenance requirement, 25% in long account

A customer has a long margin account with a market value of $86,000 and a debit balance of $23,000. What is the equity in the account?

·        $63,000

·        MV-debit balance=equity

·        86-23=63

Restricted account

·        Equity dips below 50% of market value

·        Retention requirement, firm keeps 50% of customer sale proceeds to cover debit balance

·        If customer leave proceeds from sale in account, debit balance decreases, SMA increases

Releasing money

·        NO LONGER tested

Special Memorandum account, SMA

·        Sell stock, leave proceeds in account create SMA

·        Decrease debit balance, increase SMA

·        If market value in long account increases, SMA increases

·        SMA=equity-(Reg T x MV)

·        Line of credit

·        Don’t lose until used

SMA uses

·        Buy more stock

·        Short sale

·        Buy calls and puts

·        Personal use

·        Cannot let equity <$2,000

·        Equity can’t <minimum

Initial margin call

·        Meet Reg T requirements

Maintenance call

·        Equity must get to maintenance level

Increase SMA

·        Market value increases

·        Sell stock

·        Receive cash dividends

Decrease SMA

·        Buy more stock

No SMA effect

·        Receive stock dividends because more shares at lower price

·        Market value decrease

An investor has a long margin account with a market value of $65,000 and a debit balance of $40,000. If the investor sells $20,000 all of the following are true except:

·        Equity increases

·        Equity does not increase when stock sold

·        Sell stock, equity decrease unless proceeds used to pay debit balance

·        With sale-equity same, SMA increase