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

$\text{Equity} = \text{LMV} - \text{Debit Balance}$

Or equivalently:

$\text{LMV} = \text{DR} + \text{EQ}$

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:

• LMV = $24,000
• DR = $10,000 (unchanged)
• EQ = $24,000 - $10,000 = $14,000 (58.3%)

If the stock falls to $16,000:

• LMV = $16,000
• DR = $10,000 (unchanged)
• EQ = $16,000 - $10,000 = $6,000 (37.5%)

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:

$\text{Trigger Price} = \frac{\text{Debit Balance}}{1 - \text{Maintenance \%}}$

For 25% maintenance:

$\text{Trigger Price} = \frac{\text{DR}}{0.75}$

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.

$\text{Call Amount} = (\text{Maintenance \%} \times \text{LMV}) - \text{Current Equity}$

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

• Call Amount = (0.25 x $12,000) - $2,000 = $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

$\text{SMA} = \text{Equity} - (0.50 \times \text{LMV})$

Or equivalently:

$\text{SMA} = (\text{LMV} \times 0.50) - \text{DR}$

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

• Equity = $30,000 - $10,000 = $20,000
• Reg T requirement = 0.50 x $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 x 2)
• Withdraw cash (up to SMA amount, if maintenance allows)

$\text{Buying Power} = \text{SMA} \times 2$

(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

$\text{Equity} = \text{Credit Balance} - \text{SMV}$

Or:

$\text{CR} = \text{SMV} + \text{EQ}$

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):

• SMV = $4,000
• CR = $9,000 (unchanged)
• EQ = $9,000 - $4,000 = $5,000 (125%)

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

• SMV = $8,000
• CR = $9,000 (unchanged)
• EQ = $9,000 - $8,000 = $1,000 (12.5%) — Margin call!

Short Maintenance Call Trigger

With 30% maintenance for short accounts:

$\text{Trigger Price} = \frac{\text{Credit Balance}}{1 + \text{Maintenance \%}}$

$\text{Trigger Price} = \frac{\text{CR}}{1.30}$

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:

$\text{Combined Equity} = (\text{LMV} + \text{CR}) - (\text{DR} + \text{SMV})$

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