15.2.1. 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 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 margin deficiency is the amount by which the required margin 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 an