8.5.2.2.1. Initial Margin Requirement
A margin account has an initial margin requirement, which is the amount of margin that the customer must put down in order to make a purchase. Reg T sets the initial margin requirement at 50% for purchases of equity securities. For example, a customer who wants to buy $10,000 worth of stock must deposit at least $5,000 worth of margin.
If the customer wants to buy on margin again, the stock already in her account (the LMV) must continue to meet the 50% initial margin requirement. This isn’t a problem as long as the stock doesn’t drop in value. If the stock does drop in value, the way you determine whether the 50% requirement is met is to compare the equity to the LMV. If the equity is less than 50% of the LMV, new purchases cannot be made in the account. A margin account in this condition is called a restricted account. To remove the restriction, the customer must deposit enough additional margin to bring the equity up to 50% of the LMV. Once the restriction is lifted, the customer may make new purchases as normal (i.e., by depositing 50% of the price of the new purchase).
Example: Luis opens a margin account and deposits $25,000 in cash. He can buy up to $50,000 worth of stock on margin. Before he makes any purchases, his margin account looks like this:
• LMV: $0 (because the account has no securities)
• DB: $0 (because he hasn’t borrowed any funds)
• Equity: $0 (because LMV – DB = $0)
Luis purchases $45,000 worth of stock. The first $25,000 is funded by the margin Luis deposited, and the remaining $20,000 is borrowed from the broker-dealer. Because he is using the broker-dealer’s funds, he is buying on margin. His margin account now looks like this:
• LMV: $45,000 (the value of the securities)
• DB: $20,000 (the amount borrowed)
• Equity: $25,000 (LMV – DB = $45,000 – $20,000 = $25,000)
Unfortunately, the stock drops in value to $35,000. T