Question 1

What is the Reg T initial margin requirement?

Accepted Answer

Regulation T requires a deposit of 50 percent of the purchase price for long margin accounts. For purchases under $2,000 the customer must pay in full. For purchases between $2,000 and $4,000 the FINRA minimum of $2,000 applies. For purchases over $4,000 the standard 50 percent Reg T applies.

Question 2

How do you calculate the maintenance call trigger price for a long margin account?

Accepted Answer

The maintenance call trigger price for a long margin account is calculated as Debit Register divided by 0.75, or equivalently DR divided by 75 percent. The Debit Register is fixed and does not change with market price. A maintenance call is triggered when equity falls below 25 percent of Long Market Value.

Question 3

What is the Credit Balance in a short margin account?

Accepted Answer

The Credit Balance (CR) is the fixed value in a short margin account. It equals the proceeds from the short sale plus the initial margin deposit. The key Series 7 rule is that CR never changes with market price. Only the Short Market Value fluctuates. Equity equals CR minus SMV.

Question 4

How do you calculate the maintenance call price for a short margin account?

Accepted Answer

For standard stocks priced at $5 or above, the maintenance call price for a short margin account is Credit Balance divided by 1.3. This shortcut works because the standard short maintenance requirement is 30 percent of Short Market Value. A call is triggered when SMV rises enough that equity falls below the maintenance requirement.

Question 5

What is the cheap stock rule for margin accounts?

Accepted Answer

For stocks priced below $5 per share, special margin rules apply. In a short account the maintenance requirement is 100 percent of SMV or $2.50 per share, whichever is greater. For short initial margin the deposit is the greater of $2,000 or $2.50 per share. The CR divided by 1.3 shortcut does not work for cheap stocks because the percentage-based maintenance no longer applies.

Question 6

What is a restricted margin account?

Accepted Answer

A long margin account is restricted when equity falls below 50 percent of Long Market Value but remains above the 25 percent maintenance minimum. In a restricted account the customer cannot withdraw equity or buy additional securities without depositing more funds. The account is not in violation but has no SMA or buying power.

Question 7

What is SMA in a margin account?

Accepted Answer

SMA stands for Special Memorandum Account. It represents excess equity above the 50 percent Reg T requirement in a long margin account. SMA increases when the market value rises above twice the debit balance and can be used for additional purchases or cash withdrawals. SMA never decreases due to market decline.

Question 8

What is the difference between DR and CR in margin accounts?

Accepted Answer

DR is the Debit Register used in long margin accounts and represents the amount borrowed from the broker. It is fixed and does not change with market price. CR is the Credit Register used in short margin accounts and equals the short sale proceeds plus the margin deposit. CR is also fixed. In long accounts equity equals LMV minus DR. In short accounts equity equals CR minus SMV.

Question 9

Why is the long margin call formula DR divided by 0.75?

Accepted Answer

The formula DR divided by 0.75 calculates the market value at which equity equals exactly 25 percent of LMV. Since equity equals LMV minus DR and maintenance requires equity to be at least 25 percent of LMV, solving the equation LMV minus DR equals 0.25 times LMV gives LMV equals DR divided by 0.75. Below this price a maintenance call is triggered.

Question 10

What happens when a maintenance call is triggered?

Accepted Answer

When a maintenance call is triggered the customer must deposit additional funds or securities to bring equity back to the maintenance minimum. If the customer does not meet the call the broker may liquidate securities in the account to restore the required equity level. The broker is not required to give the customer advance notice before liquidating.

Margin Safety Simulator

Confused by Short Margin?

Confused by Short Margin?

Margin Safety Simulator Summary