Margin Accounts Series 7 - Margin Help, Long Accounts

A margin account is when a brokerage firm opens an account for a customer for the purpose of loaning that customer money to leverage into securities transactions. These trades must be with marginable securities designated by the FRB and the NYSE.

The Series 7 asks questions related to long margin accounts and some students require extra help than what their books are showing. It can also be a bit of a formula and math section on the exam.

The FRB Regulation T allows for firms to loan up to 50% for transactions in margin accounts. The firm may require more from the customer depending on the risk of the security and whether it is a new account or not. When just speaking to long margin accounts, the firm loans money as leverage. This amount is known as the debit balance. This debit does not change with market fluctuation and is charged margin interest. It can rise if the customer buys more securities and takes out more margin. The Series 7 will test on these balances as purchases and sales happen.

The Long Market Value is the total value of the long position owned. This does not take into account the equity or debit balance. The Long Market Value or LMV minus the Debit Balance or DB equals the equity for the customer.

An example is best for Series 7 understanding and help (or other exam):

A customer buys $40,000 of AGH Stock in a long margin account and is loaned 50% as per Reg T. The account will look as follows:

LMV: $40,000
DB: $20,000
EQ: $20,000

The debit balance will not fluctuate with the market. Only the LMV and the equity will rise or fall with the market.

If AGH rises to $45,000, the debit balance would remain at $20,000 as that is what is owed to the firm. The firm is not going to penalize you for the market rising and they are not sharing in profits in any way. This is not a shared account. The $20,000 was a 50% leverage loan on the original $40,000. So the LMV is $45,000, the DB is $20,000 and the equity is now $25,000.

If the market declined to $35,000, the same would hold true as far as what changes. The LMV would be $35,000, the debit balance would be $20,000 and the equity would now only be $15,000.

This account would be considered restricted. There are certain rules with restricted accounts. We will do a specific post to these accounts soon for Series 7, Series 24 or other license studends and others looking to learn about margin accounts and get help.

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