Quick Answer
Margin accounts let customers borrow money from a broker-dealer to buy securities, using the purchased securities as collateral. The margin agreement includes a credit agreement, hypothecation agreement, and loan consent form. Regulation T sets 50% initial margin, FINRA requires at least $2,000 of equity (or the full cost, if less), and FINRA sets 25% maintenance margin.
Now that you understand cash accounts where customers pay in full, margin accounts introduce borrowing, allowing customers to leverage their investments using the broker-dealer's money.
How Margin Accounts Work
- A margin account allows customers to borrow money from the broker-dealer to purchase securities
- The purchased securities act as collateral for the loan
- Requires a separate margin agreement with three components:
| Component | Purpose | Required? |
|---|---|---|
| Credit agreement | Establishes the terms of the loan and the interest rate | Yes |
| Hypothecation agreement | Pledges the customer's securities as collateral for the loan | Yes |
| Loan consent form | Allows the broker-dealer to lend the customer's securities to others | No (optional) |
Exam Tip: Gotchas
The loan consent form is optional, not required. Exam questions may try to present it as mandatory.
Key Margin Regulations
Margin accounts are governed by multiple regulators:
| Regulator | Requirement | What It Controls |
|---|---|---|
| Federal Reserve Board | Regulation T | Initial margin requirement (50%) |
| FINRA | Margin rule | Minimum equity to buy on margin ($2,000, capped at the purchase cost) and minimum equity that must be maintained (25%) |
| Broker-dealer | House requirements | Can be higher than FINRA minimums, never lower |
Exam Tip: Gotchas
Regulation T sets the INITIAL margin requirement (50%). FINRA sets the MAINTENANCE requirement (25% minimum). These are different requirements set by different regulators. FINRA also sets the $2,000 minimum equity that applies when the customer buys. The exam loves to test which regulator controls which requirement. Firms can set "house" requirements higher than the FINRA minimum but never lower.
Key Margin Terms
| Term | Definition | Key Detail |
|---|---|---|
| Initial margin | Deposit the customer must make to buy on margin | 50% of the purchase price under Regulation T, raised to FINRA's $2,000 minimum equity when 50% is less, and never more than the full cost |
| Maintenance margin | Minimum equity that must be maintained | 25% for long positions |
| Margin call | Demand for additional funds or securities | Triggered when equity falls below maintenance |
| Debit balance | The amount borrowed from the broker-dealer | Remains fixed unless repaid |
| Equity | Market value minus debit balance | What the customer actually "owns" |
| Buying power | Maximum amount the customer can purchase | Based on available excess equity |
The $2,000 Minimum Equity
- Regulation T's 50% is not the only test when a customer buys on margin
- FINRA's margin rule requires a deposit of at least the greater of:
- The Regulation T amount (50% of the purchase price), or
- Enough to give the account equity of at least $2,000
- The customer never has to deposit more cash than the cost of the securities purchased
- On an opening purchase in a new margin account, the required deposit works out like this:
| Purchase | 50% under Regulation T | Required deposit | Why |
|---|---|---|---|
| $1,500 | $750 | $1,500 | $2,000 would exceed the cost, so the customer pays the full cost |
| $3,000 | $1,500 | $2,000 | The $2,000 minimum is greater than 50% |
| $20,000 | $10,000 | $10,000 | 50% is greater than $2,000 |
Exam Tip: Gotchas
- On any purchase under $4,000, 50% comes to less than $2,000, so the $2,000 minimum controls, capped at the full purchase cost.
- A $3,000 opening purchase needs $2,000, not $1,500. A $1,500 opening purchase needs the full $1,500, not $750 and not $2,000.
Margin Account Example
Here is how margin works in practice:
- Customer buys $20,000 of stock on margin
- Deposits $10,000 (50% initial margin)
- Debit balance = $10,000 (borrowed from broker-dealer)
- If the stock falls, the debit balance stays at $10,000, so equity (market value minus debit balance) shrinks
- If equity falls to, say, 20% of market value, it is below the 25% maintenance requirement
- A margin call is triggered; the customer must deposit additional funds or securities
What Should You Check on Exam Day?
- Can you explain the three components of a margin agreement, and which one is optional?
- Do you know the Regulation T initial margin requirement, and when FINRA's $2,000 minimum equity (capped at the full cost) sets a larger deposit?
- Can you state the FINRA maintenance margin requirement for long positions?
- Do you know whether a broker-dealer's house requirements can be lower than FINRA's minimum?
- Can you explain what triggers a margin call?