Podcast Episode 8: Margin Accounts

Introduction

• Host: Series 7 Guru from Las Vegas
• Episode Focus: Margin Accounts
• Margin accounts are a small part of Series 7 exam (~3-4 questions)
• Link to a full margin class replay will be provided
• Feedback requested on preference for live class or recorded lecture replay
• Warning: Majority of test prep overemphasizes margin; better to focus on other areas

Margin Account Documentation

• Credit Agreement: Mandatory; client understands borrowing money and interest payments
  • Interest based on broker call rate, a competitive loan for customers
• Hypothecation Agreement: Mandatory; pledging securities as collateral
  • Securities in "street name" (broker dealer's name for operational ease)
• Loan Consent Form: Optional; allows other customers to borrow securities

Regulation and Requirements

• Reg T (Securities Act of 1934): Federal Reserve Board controls credit extension
  • Initial margin requirement set at 50%
  • Non-marginal securities: new issues (30 days from effective date) and options
• Accounts that must be cash accounts: retirement and UTMA accounts

Types of Margin Accounts

• Portfolio Margin Accounts: Dynamic requirements; $100,000 minimum equity
  • Requires more leverage but lower maintenance calls
• Day Trading Accounts: Defined by 4+ trades in 5 business days; $25,000 minimum equity

FINRA and Initial Transactions

• Minimum equity in a new margin account: $2,000
• Two scenarios:
  1. Buy 100 shares at $18, require full payment due to $2,000 minimum
  2. Buy 100 shares at $30, need to deposit $2,000 even if half would suffice

Loan Value and Equations

• Loan value: Amount that can be borrowed against collateral
• Classical Margin Equation: Long Market Value - Debit = Equity
• Excess Equity: When market value increases, creates borrowing power
  • Special Memorandum Account (SMA) holds excess equity

Risk and Maintenance

• Leverage is financial speed; increases risk of loss
• Minimum maintenance: 25% for long, 30% for short positions
• House requirements often more stringent
• Risk mitigation for short positions:
  • Buy protective calls
  • Enter buy stop orders

Short Selling

• Selling borrowed securities requires a margin account
• Regulation SHO: Locate requirement for short selling
• Classical Short Equation: Credit Register - Short Market Value = Equity

Conclusion

• Episode 9 will focus on customer accounts
• Encouragement: "Inch by inch your Series 7 is a cinch and yard by yard it’s hard"