Price Declines and Restricted Margin Accounts
If the securities fall in value, the long market value falls, and the equity also falls. For example, if the security’s market 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 amount the customer borrowed, the debit balance of $30,000, remains unchanged. This means that the customer’s equity has now dropped to $20,000. The customer may have put up $30,000 when she bought the stock, but if she were to sell it today, she would only get $20,000 back after paying off her loan.
Moreover, this situation does not look good to the lender. The customer’s equity has dropped from 50% to 40% of the long market value, creating a margin deficiency. A