7.2.1.2.1.1. 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 is the amount by which the required margin (50% of LMV) exceeds the equity in the margin account.
An account in which the equity falls below 50% of the LMV is called a restricted account. There are very few restrictions on a restricted account, however. Customers are not required to eliminate the margin deficiency. They may continue to buy additional stock, as long as they deposit the required initial margin on each new purchase. However, a customer with a restricted account who sells a security is required to deposit 50% of the proceeds into the margin account to reduce the debit balance and thereby reduce the margin deficiency.