Series 7: Unit 6 Margin Accounts

Front 1

on margin

Back 1

a common practice in securities industry, allows customers to increase their trading capital by borrowing from broker/dealers

Front 2

long margin account

Back 2

customers purchase securities and pay interest on the money borrowed until the loan is repaid

Front 3

short margin account

Back 3

stock is borrowed and then sold short, enabling the customer to profit if its value declines

Front 4

long margin customer borrows money

short margin customer borrows securities

Back 4

what is the difference between short and long margin accounts?

Front 5

purchase more securities with lower inital cash outlay

leverage the investment by borrowing a portion of the purchase price

Back 5

what are the advantages of margin accounts for investors

Front 6

Gain or loss divided by initial investment -

Back 6

how to calculate gain or loss for margin accounts

Front 7

margin account loans generate interest income for the firm

margin customers typically trade larger positions because of increased trading capital, generating higher commissions

Back 7

what are advantages of margin accounts for brokers

Front 8

Credit agreement

hypothecation agreement

loan consent form

Back 8

What 3 parts are consisted in margin agreement

Front 9

Credit agreement

Back 9

discloses the terms of the credit extended by the broker/dealer including the method of interest computation and situations under which interest rates may change

Front 10

hypothecation agreement

Back 10

gives permission to the broker/dealer to pledge customer margin securities as collateral

Front 11

Street name

Back 11

the name of the firm where customer securities are held under for margin accts

Front 12

nominal or named, owner

Back 12

what the broker/dealer is known as when securities held under street name

Front 13

beneficial owner

Back 13

what the customer is known as when securities held under street name

Front 14

Loan consent form

Back 14

if signed gives permission to the firm to loan customer margin securities to other customers or broker/dealers usually for short sales

Front 15

The credit agreement and hypothecation agreement are mandatory

loan consent form is optional

Back 15

Which of the 3 parts of the loan agreement are mandatory and optional?

Front 16

Broker call rate

Back 16

the interest paid on margin accounts is a variable rate based on this rate

Front 17

Regulation T

Back 17

For margin accounts, this states that customers must deposit a minimum of 50% of the market value of the transaction within 5 business days. Customer can choose to deposit more

Front 18

Margin is amount of equity that must be deposited to buy securities in a margin account

Marginable refers to securities that can be used as collateral in a margin account

Back 18

what is difference between margin and marginable

Front 19

Exchange listed stocks, bonds

Nadsaq stocks

Non-Nasdaq OTC issues approved by the FRB
Warrants

Back 19

What may be purchased on margin and used as collateral

Front 20

Put and call options
Rights
Non nasdaq OTC issues not approved by the FRB
Insurance contracts

Back 20

What cannot be purchased on margin and cannot be used as collateral

Front 21

Mutual funds

new issues

Back 21

cannot be used as margin but can be used as collateral after 30 days

Front 22

When writing a covered call there is no regulation T requirement, customer must have 50% of the purchase price of the stock in the account

Back 22

What does Regulation T apply when writing a covered call?

Front 23

Only type of option that can be purchased on margin

Leaps options with more than 9 months to expiration can be purchased on margin. The requirement is 75%

Back 23

What should be known for purchasing LEAPS options on margin?

Front 24

The maximum loss

Back 24

Regarding spreads, what does Reg T require for deposit?

Front 25

US Treasury Bills, notes, and bonds
government agency issues
municipal securities

Back 25

What securities are exempt from Regulation T?

Front 26

Although Reg T states a deposit of 50% of market value

FINRA require initial deposit cannot be less than $2,000

exception is when initial purchase is less than $2,000

Back 26

How much is required to be deposited for the first purchase in a margin account

Front 27

If the purchase is less than $2,000 deposit 100% of purchase

If purchase is between $2,000 and $2,000 deposit $2,000

If purchase is more than $4,000, deposit 50%

Back 27

What should be remembered requiring amount of purchase and amount of required deposit

Front 28

Still must deposit $2,000 is never waived even if less

Back 28

What is the FINRA minimum deposit rule regarding short margin accounts?

Front 29

Freeriding

Back 29

when securities are purchased and then sold before making payments for the purchase.

Front 30

6.2

Back 30

6.2

Front 31

Marking to market

Back 31

The practice of recalculation to check the status of the equity in the account

Front 32

LMV long market value

Back 32

the current market value of the stock position the investor purchased

Front 33

DR debit register

Back 33

the amount of money borrowed by the customer

Front 34

Equity EQ

Back 34

the customer's net worth in the margin account; it represents the portion of the securities the customer fully owns

Front 35

LMV - DR = EQ

Back 35

How to calculate the amount of equity in the account?

Front 36

25% of the long market value

Back 36

What is the minimum maintenance in a long margin account?

Front 37

WHen the market value goes up or down, the DR does not change

Back 37

What is relationship between market value and DR

Front 38

Restricted account

Back 38

When the equity in the account is less than the Reg T amount but greater than or equal to the minimum maintenance requirement

Front 39

maintanance call

Back 39

demand that the customer make a payment to bring the account back to minimum

Front 40

House minimum

Back 40

When a firm imposes a maintenance level higher than the FINRA minimum maintenance rule levels

Front 41

market value at maintenance formula

DR divided by .75

Back 41

formula to calculate the market value to which securiteies can fall before there is a maintenance call

Front 42

Excess equity

Back 42

the amount of equity exceeding the REg T requirement

Front 43

SMA or buying power / special memorandum account

Back 43

What excess equity creates in the margin account

Front 44

The amount of SMA in the account is equal to the greater of the excess equity or the amount already in SMA

Back 44

What is the SMA amount equal to in a margin account?

Front 45

SMA increases when market value increases but does not decrease when market value decreases

Back 45

what is relationship between SMA and market value

Front 46

Nonrequired cash deposits - full amount reduces the debit and is also credited to SMA

Dividends: can withdraw these distributions even if the account is restricted

Back 46

What generates SMA besides excess equity?

Front 47

Adds to the DR

As long as does not cause a maintenence call

Back 47

Using SMA adds to what value and SMA can be used until what happens?

Front 48

Customer can purchase $2 of stock for every $1 of SMA, in other words the buying power is 2:1

Back 48

What is relationship between SMA value and buying stock?

Front 49

to purchase additional securities, put up 50%

to withdraw securities from the account, customer must deposit cash equal to 50% of the value of the securities to be withdrawn

if securities are sold in a restricted account, at least half the proceeds must be retained in the account to reduce the debit balance. 50% of proceeds are credited to SMA

Back 49

If the account is restricted what are the 50% rules?

Front 50

Retention requirement

Back 50

if securities are sold in a restricted account, at least half the proceeds must be retained in the account to reduce the debit balance

Front 51

All but equity are effected: LMV DR and SMA

Equity is affected only is customer removes half the proceeds

Back 51

When securities are sold in a restricted account, which of the follwoing are effected? LMV, DB, SMA, EQ

Front 52

day trader

Back 52

one who buys and sells the same security on the smae day to try to take advantage of intraday price movements

Front 53

pattern day trader

Back 53

one who executes four or more day trades in a five business day period

Front 54

four times the maintenance margin excess

Back 54

What is pattern day traders buying power

Front 55

the equity in the account above the 25% minimum requirement

Back 55

What is the maintenance margin excess

Front 56

Cross guarantee

Back 56

one for which another customer, in writing, agrees to the use of money or securities in his account to carry the guaranteed accounts (the meet any margin calls)

Front 57

Selling short

Back 57

investor uses to profit from a decline in a stock's price. Always done through a margin account

Front 58

Stock lender

Back 58

from whom the shares are borrowed

Front 59

Margin deposits

Back 59

to borrow shares for short sales, an investor must make these. Can be met with either cash or marginable securities

Front 60

SMV short market value

Back 60

The current market value of the stock position the investor sells short

Front 61

CR Credit register

Back 61

the amount of money in the customer's account; equal to the sales proceeds plus the margin deposit requirement

Front 62

Equity (EQ) calculated by CR - SMV = EQ

Back 62

The customer's net worth in margin short account, the amount is determined by what equation

Front 63

$2,000 is required even if customer sells short less than $2,000 worth or securities. If Reg T requirement is greater than $2,000 then that is minimum

Back 63

What is the minimum deposit for short margin account

Front 64

30% of the SMV

Back 64

WHat is the minimum maintenance requirement for short positions?

Front 65

CR Credit balance for short margin

Back 65

provides securitiy to broker/dealer that there will be cash available for the customer to purchase the securities if the market value of the securities rises

Front 66

Total credit balance divided by 130% (1.3)

Back 66

How to find maximum market value to which a short sale position can increase before a maintenance call is issued

Front 67

For stock trading under $5 per share, customer must maintain 100% of SMV of $2.50 per share whichever is greater

for stock trading at $5 per share and above, minimum requirement is $5 per share or 30%, whichever is greater

Back 67

what are the exceptions for minimum maintenance margin requirement based on share price?

Front 68

combined account

Back 68

client who has a margin account with both long and short positions in different securities has this

Front 69

LMV + CR - DR - SMV = EQ

Back 69

What is the calculation for combined equity?

Front 70

CPM Customer portfolio margining

Back 70

different way to calculate margin requirements for an account based on the net risk of an entire portfolio of securities rather than a standardized percentage applied to each individual position

Front 71

SMA increases only if the new excess equity is higher than old SMA

Back 71

What is effect on SMA for rise in market value

Front 72

Client is entitled to excess equity in the account after the sale, or to 50% of the sale proceeds, whichever is greater

Back 72

What is effect on SMA for sale of securities

Front 73

The full amount of the deposit is credited to SMA

Back 73

What is the effect of depositing cash on SMA

Front 74

SMA is increased by the loan value of the securities deposited as prescribed by Regulation T at the time of the deposit

Back 74

What is the effect of deposit of marginable securities on SMA

Front 75

100% of a cash dividend or interest is credited to SMA

Back 75

What is effect of dividends or interest on SMA

Front 76

The margin requirement on new purchases is deducted from SMA. If SMA is insufficient to meet the charge, a regulation T call is issued for the balance

Back 76

What is the effect of purchase of securities on SMA

Front 77

the full amount of the cash withdrawal is deducted from SMA. Remaining equity may not fall below FINRA rules or house equity requirement

Back 77

What is effect of withdrawal of cash from SMA

Front 78

After the SMA balance is established iti s not affected by a fall in market value in a long account

Back 78

What is effect of SMA for fall in long account market value

Front 79

SMA remains the same

Back 79

what is effect of interest charges to account and stock dividend or split for SMA

Front 80

hypothecation

Back 80

pledging of customer securities as collateral for margin loans

Front 81

rehypothecates (repledges)

Back 81

After customer pledges their securitiesi to the broker/dealer, the broker does this as collateral for a loan from the bank