Long Positions in Margin Accounts
When a customer buys 1,000 shares on margin, we say that the customer is “long” 1,000 shares.
Suppose a customer purchases 1,000 shares at $60/share on margin. The long market value (LMV) of the stock is $60,000. Regulation T requires the customer to put down at least 50% of this amount ($30,000) to buy the securities. The following equation is useful for understanding margin:
|
LMV |
– |
debit balance |
= |
equity |
|
$60,000 |
– |
$30,000 |
= |
$30,000 |
- • LMV = the current market value of the stock (the market price of the stock times the number of shares)
- • Debit balance = the money the customer borrows from the broker-dealer
- • Equity = the value of the stock the customer owns
Price Declines and Restricted Margin Accounts
Once the securities are bought, they may either rise or fall in value. All margin accounts are “marked to the market” daily. That is, securities in the margin account are continuously revalued consistent with their current market price, as measured by the previous day’s last sale.
If the securities fall in value, the long market value falls, and the equity also falls.
For example, if the security’s price drops to $50 per share, long market value in the customer’s margin account also drops to $50 per share.
|
LMV |
– |
debit balance |
= |
equity |
|
$50,000 |
– |
$30,000 |
= |
$20,000 |
The equity has now dropped from 50% to 40% of the LMV, creating a margin deficiency. A margin deficiency