Margin Calculations

Margin calculations are heavily tested on the Series 7 exam. Understanding the formulas and relationships for both long and short margin accounts is essential for passing.

Long Margin Account Components

A long margin account has three key values:

The Basic Formula

Equity = Long Market Value − Debit Balance

Or equivalently: LMV = DR + EQ

Key Point: The debit balance (loan) stays constant unless the customer makes payments or borrows more. When the market value changes, only equity changes.

Long Margin Example

A customer deposits $10,000 to buy $20,000 of stock:

If the stock rises to $24,000:

If the stock falls to $16,000:

Margin Call Trigger Points

Maintenance Call Calculation

A maintenance call is triggered when equity falls below 25% of market value.

Formula to find the trigger price:

Trigger Price = Debit Balance ÷ (1 − Maintenance %)

For 25% maintenance: Trigger Price = Debit Balance ÷ 0.75

Example: With a $10,000 debit balance: Trigger = $10,000 ÷ 0.75 = $13,333

If LMV falls to $13,333, equity would be $3,333 (exactly 25%). Below this triggers a maintenance call.

Maintenance Call Amount

When a call is triggered, the customer must deposit enough to restore equity to the maintenance level.

Formula: Call Amount = (Maintenance % × LMV) − Current Equity

Example: LMV = $12,000, DR = $10,000, EQ = $2,000

Call Amount = (25% × $12,000) − $2,000 Call Amount = $3,000 − $2,000 = $1,000

Special Memorandum Account (SMA)

SMA is a line of credit that accumulates when a margin account has excess equity above Regulation T requirements.

How SMA Increases

SMA increases when:

• Stock appreciates above Reg T equity
• Cash dividends are received
• Cash is deposited
• Securities are sold

SMA Calculation

SMA = Equity − (50% × LMV)

Or equivalently: SMA = (LMV × 50%) − DR

Example: LMV = $30,000, DR = $10,000

Equity = $30,000 − $10,000 = $20,000 Reg T requirement = 50% × $30,000 = $15,000 SMA = $20,000 − $15,000 = $5,000

Using SMA (Buying Power)

SMA can be used to:

• Purchase additional securities (buying power = SMA × 2)
• Withdraw cash (up to SMA amount, if maintenance allows)

Buying Power = SMA × 2 (because 50% margin means $1 of SMA supports $2 of purchases)

Important: SMA is a running balance that doesn't decrease when market values fall. However, using SMA when equity is near maintenance could trigger a margin call.

Short Margin Account Calculations

Short selling is more complex because the customer owes shares, not dollars.

Short Account Components

The Short Formula

Equity = Credit Balance − Short Market Value

Or: CR = SMV + EQ

Short Account Example

A customer shorts 100 shares at $60 (=$6,000), depositing 50% ($3,000):

If stock falls to $40 (profitable for short seller):

If stock rises to $80 (loss for short seller):

Short Maintenance Call Trigger

With 30% maintenance for short accounts:

Trigger Price = Credit Balance ÷ (1 + Maintenance %) Trigger Price = Credit Balance ÷ 1.30

Example: CR = $9,000 Trigger = $9,000 ÷ 1.30 = $6,923

If SMV rises above $6,923, a maintenance call is triggered.

Combined (Mixed) Margin Account

When a customer has both long and short positions:

Combined Equity = (LMV + CR) − (DR + SMV)

The account is analyzed as a whole for maintenance purposes.

Key Margin Formulas Summary

On the Exam

The Series 7 exam frequently tests:

• Calculating equity in long and short accounts
• Determining when margin calls are triggered
• Computing SMA and buying power
• Understanding that debit/credit balances remain constant while market values change