Long Margin Account Calculations
With the rules for margin accounts established, you're ready to tackle the math. Long margin accounts are the foundation; master these calculations and the short account math will follow naturally.
Key Terms and Formulas
| Term | Definition | Formula |
|---|---|---|
| Long Market Value (LMV) | Current market value of securities held long | Price x Shares |
| Debit Balance (DR) | Amount the customer owes the broker-dealer (the loan) | Fixed at purchase; changes only through activity |
| Equity | Customer's ownership stake in the account | LMV - DR |
| Regulation T (Reg T) Requirement | 50% of LMV that must be equity | LMV x 50% |
| Excess Equity | Equity above the Reg T requirement | Equity - Reg T Requirement |
| Loan Value | Maximum amount the broker-dealer can lend | LMV x 50% |
The most important formula: Equity = LMV - DR
Think of it this way: Your home's value minus your mortgage equals your equity. Margin equity works the same way.
Initial Purchase Example
A customer buys 100 shares of XYZ at $100/share in a new margin account:
| Item | Amount |
|---|---|
| LMV | $10,000 |
| Reg T requirement (50%) | $5,000 |
| Customer deposits | $5,000 |
| Debit balance (loan) | $5,000 |
| Equity (LMV - DR) | $5,000 |
- The customer deposits $5,000 (50%); the broker-dealer lends $5,000 (the debit balance)
- At this point, equity exactly equals the Reg T requirement; no excess equity
Market Value Increase: Excess Equity
If XYZ rises to $120/share:
| Item | Amount |
|---|---|
| LMV | $12,000 |
| Debit balance | $5,000 (unchanged) |
| Equity (LMV - DR) | $7,000 |
| Reg T requirement (50% of $12,000) | $6,000 |
| Excess equity | $1,000 |
- Excess equity of $1,000 is credited to the Special Memorandum Account (SMA) (covered in a later section)
- The debit balance does not change when the market moves; it only changes through deposits, withdrawals, interest charges, or transactions
Exam Tip: Gotchas
- The debit balance is fixed at the loan amount. It does not fluctuate with market value. Only equity changes when the market moves. The debit balance only changes when the customer takes action (buys more, sells, deposits, or withdraws) or when interest accrues.
Market Value Decline: Restricted Account
If XYZ falls to $80/share:
| Item | Amount |
|---|---|
| LMV | $8,000 |
| Debit balance | $5,000 (unchanged) |
| Equity (LMV - DR) | $3,000 |
| Reg T requirement (50% of $8,000) | $4,000 |
| Equity shortfall | $1,000 below Reg T |
- The account is now restricted; equity is below the 50% Reg T requirement
- A restricted account is not the same as a maintenance call; the customer does not need to deposit additional funds immediately
- In a restricted account:
- The customer cannot buy more securities unless they deposit 50% of the new purchase price
- When selling, 50% of the sale proceeds must be used to reduce the debit balance (the retention requirement)
Think of it this way: Restricted does not mean danger. It just means the account has less equity than Reg T requires. The customer can still hold their positions. A maintenance call only occurs when equity drops below 25% of Long Market Value (LMV).
Exam Tip: Gotchas
- Restricted (equity below 50% of LMV) is not a maintenance call (equity below 25% of LMV). Students often confuse these two thresholds. A restricted account limits new purchases but does not trigger a margin call.
Buying Power
- Buying power = Excess equity / Reg T rate = Excess equity / 0.50 = 2 x Excess equity
- Equivalently: Buying power = 2 x SMA balance
- This makes intuitive sense: for every $1 of excess equity, the customer can deposit that $1 toward a $2 purchase (the other $1 comes from the margin loan)
Example: If excess equity (SMA) is $1,000, the customer can purchase up to $2,000 of additional securities without depositing new funds.
- Using buying power increases the debit balance and reduces SMA
Exam Tip: Gotchas
- Buying power = 2 x excess equity (or 2 x SMA). The "2x" comes from the 50% Reg T rate; each dollar of excess equity supports a two-dollar purchase.
- Equity = LMV - DR is the foundation of all long margin math. If you know any two of the three values, you can find the third.