A margin account is a brokerage account in which the broker lends the customer a portion of the purchase price of securities. The securities act as collateral for the loan.
Key margin concepts:
| Concept | Definition | |---|---| | Initial margin (Reg T) | 50% of purchase price — must be deposited by customer | | Maintenance margin (FINRA) | 25% equity for long positions; 30% for short | | Equity | Market value of securities minus the debit balance (loan) | | Debit balance | Amount owed to broker | | Margin call | Demand to deposit additional cash or securities |
Example: Buy $10,000 of stock on margin. Customer deposits $5,000 (50% Reg T). Broker loans $5,000 (debit balance). If stock falls to $6,667, equity = $6,667 − $5,000 = $1,667 = 25% → margin call triggered.
Margin agreement: Customer must sign a margin agreement containing: - Credit agreement — terms of the loan. - Hypothecation agreement — pledges securities as collateral. - Loan consent form (optional) — permits broker to lend customer's securities.
Short selling requires a margin account: Short sellers must deposit the Reg T requirement because borrowed shares carry credit risk.
Regulation T: Set by the Federal Reserve; currently 50% initial margin.
> Exam tip: Know the formula: Equity = Market Value − Debit Balance. Maintenance margin call occurs when equity % falls below 25% long (30% short). Firms may have stricter "house" requirements.