well greetings and salutations test takers this is the series 7 Guru coming to you from my studio here in fabulous Las Vegas with our next episode in our podcast series episode eight uh margin accounts so I will provide a link in the video description and the pin comments to the full margin lecture uh or margin class replay uh let me know what you would prefer live class replay or a uh recorded lecture uh one or the other I'll definitely maybe I'll pin both but uh the title of the lecture is don't overdose on series seven margin there's only three or four questions in this area and all test prep vendors go way overkill on margin I mean if you tell me you missed your mark on Series 7 because of margin I'm GNA say you had bigger problems elsewhere now unfortunately we don't know what those three or four questions are so that means we probably got to put do a little more work than is necessary uh if you want to do more than that you know I'm warning you I think your time is better spent elsewhere uh however you know I felt bad somebody was uh wanted tutoring on a bunch of hellacious margin questions and if you go to tutoring replays you can watch uh her and I do a bunch of margin uh practice questions together anyways that being said uh we want to make sure we always pick the lwh hanging through right and so you definitely should know margin account documentation the additional documentation necessary to open a margin account and the first part of that documentation is the credit agreement the credit agreement is mandatory and that's where the client says he understands that he's borrowing money and he's paying interest the interest is paying is based on broker call Broker call is what banks charge brokerage firms for money and when we hypothecate or re hypothecate customer Securities whenever the bank typically charges the broker dealer the broker dealer then rends that to the customer at broker call plus you know this can still be a very competitive loan for a customer where they want to borrow money to purchase Securities uh or whether they want to just borrow money they want their smate as cash or they want to use it as buying power it can be a very competitive loan a credit agreement is mandatory hypothecation agreement is mandatory the hypothecation that's just a fancy word for pledging uh Securities as collateral right if I go into my pawn shop and I want to hypothecate my Rolex you know that means I'm pledging the Rolex as collateral for the loan so that's what hypothecation means so that means your securities uh this says your customer knowledge is mandatory that they understand that they're pledging their Securities to C for the loan that they don't uh fulfill the responsibilities we're going to sell them out and that's very important because that means the Securities are in street name street name means the name of the broker deal deer so you know when you open a cash account I say listen in a cash account you have a choice I say would you like to uh put your securities and street name the name of the broker dealer it'll be a lot easier operationally backstage if we do so but it's your choice you know in a margin account you have no choice the Securities will be in Street a now uh that means a lot of prox material that issuers send to shareholders when they look at their shareholder list it looks like the broker dealer you know maril Lynch Morgan Stanley it looks like they own the Securities that's not true that are marilynch and Morgan Stanley margin customers whose Securities are in street name so when we get that proxy material from the issue with the broker dealer we have to afford that to those customers at no charge now the third document in the margin documentation is not required and this is called the loan consent form this is where we tell the customer we have other customers who wish to EST establish short positions would it be okay to lend our other customers your securities that you're long and the customer says well Dean I don't think it's in my best interest to be lending uh my Securities to customers who want to go short to security I say it's not and that's why the loan consent form is optional so you know when somebody wants to borrow money or borrow Securities they must open a margin account if they want to borrow Securities they say well let me call stock loan and see if we have any c customers who have signed the loan consent form and said it's okay to lend them lend their Securities to customers like you there is a locate requirement uh by the way we hope we can get it internally through stock loan but we could also borrow that else elsewhere main point is the loan consent form is not mandatory it's optional now prior to 1934 we as broker dealers were in charge of credit extension to our customers and when we were charged that was called The Roaring 20s you'd give me 10 grand I'd loan you 90 grand to purchase Securities and heck I'd lend you money to buy anything you want what do I care at the end of the Ring 20s there was a crash and we decided maybe broker dealers aren't the best decision makers about credit extension to customers and so reg T is a part of the Securities Act of 1934 and ultimately it says the Federal Reserve board is the one in charge of credit extension of broker dealers to customers and one of those is what's called regt and regt says the federal will establish how much a customer needs to initially be at risk right now reg te is 50% so if you buy a th000 shares at 40 That's $40,000 as a margin clerk say do you want to do this in your cash account do you want to pay in full or do you want to do this in your margin account would you like us to lend you part of that purchase price you'll let's do it in my margin account I say okay so uh you have to put up initially $20,000 50% now there are certain Securities that the Federal Reserve board says are ineligible or non-marginal meaning you can't we can't lend you money to buy them and we can't extend you credit the two big ones to be aware of on the series 7 are new issues we don't lend your money to buy a new issue it's considered a new issue 30 days from the effective date we don't lend you money to buy options there are exceptions and there's more of those but those are the two big ones I told you don't overdose on margins so you know uh didn't get into the weeds here there are certain accounts that are ineligible for margin what we mean by that is they must be cash accounts the big one we test on is retirement accounts and utma accounts you know you can't as a custodian leverage up the kid and say hey uh it didn't quite work out so about a maintenance call no no no so big ones to be aware of on your test it must be cash accounts or retirement accounts and upma accounts we also have different types or I don't know subcategories of margin accounts we have portfolio margin accounts and the minimum equity in a portfolio margin account is 100,000 the upside to having a portfolio M margin account is the uh maintenance and the requirements are dynamic in terms of scoring in other words if you short the stock and you got a call you don't have unlimited risk and we'll score that accordingly and your maintenance calls don't need to be met promply a day trading accounts you should definitely know the definitional uh definition of a day trading account it's when somebody does four or more day trades with a five business day period and the test question is the minimum Equity is 25,000 they're also going to get to have more uh leverage allow be allowed to use more leverage I told you portolio margins 100 grand these are aim and shoe Point click recognition questions and their Dynamic uh margin requirements stupid but testable stupid but testable I don't know why finrod loves this question it's on the siie it's on your Series 7 that we're discussing presently if you're going onto a series N or 10 or 24 it's there as well so first trade in a new account or another phraseology you might encounter on your is initial transaction so the self-regulatory organization this isn't Federal Reserve board as the point it's is finra says that the minimum equity in a new margin account is $2,000 now the trick on the test is there's two versions of this uh trick question on the test initial transaction you buy a 100 shares at 18 and you say Dean I know how margin accounts work 100 shares at 18 let's open a new account let's do it in my margin account $900 I said well if you had an established margin account with me that would be correct however finra the SRO has a minimum of 2,000 he said well I'll send you 2,000 I go whoa whoa whoa why would you want to send me $2,000 to buy $800 worth of stock this is very testable you're just going to pay in full so 2,000 or less in a new margin account initial transaction customer pays in full Peri period full stop second version of this trick question very testable you say Dean sounds like a wonderful idea let's open a new account let's buy a 100 shares at 30 and I know how margin accounts work I'll send you $1,500 I well if you had an established account with me that would be correct but we have a minimum of $2,000 so you need to send me $2,000 so between 2,000 and 4,000 the customer must deposit 2,000 you know over 4,000 there's no trick it's just like any other margin account in terms of the initial uh deposit so loan value is how much I can extend in credit against collateral right you know I had a a customer one time I'm dating myself but you know this is the early 90s and you know until the early 90s Banks and brokerage firms were separate things you couldn't be a bank and a brokerage firm and anyways uh you know he couldn't get a loan at the bank and I said well g mark why can't get a loan then they said well Dean they told me asked me if I had a job and I said I didn't have a job and then they said you know no job no loan I said well Mark did you tell them you don't have a job because you're rich he said well no I said well listen you have $5 million and fully paid for Securities I can extend you a loan of up to $2 and5 million on that $5 million and fully paid for Securities or Mark I can let you buy another $5 million of Securities with that5 million right 10 million minus 5 so that loan value is how much the customer can borrow against the collateral right loan value the classical margin equation is long market value minus debit equals Equity I think the best analogy here is a house market value of the house minus mortgage on the house equals equity on the house you know Equity represents what you would have if you sold the house and paid off the loan nobody's suggesting you do that you know some banks might say Hey you have excess equity in the house you have more equity in the house than is necessary would you like to borrow against that we could hook you up with an excess equity line of credit against the home he said yeah I'd love that i' say great now be careful because when you write that check the mortgage on the house goes up and the equity goes down right you're drawing it the only way you get your own Equity of the house is to sell it so that's a good analogy for what's going on in a margin account now if you disend you know margins you know when I teach live classes who knows I'll get to teach a live class again and I ask people what do they want to help with they say margin and options I said well let's be very clear options is the bigger deal you know I'm going to help you on both but let's be clear options a bigger deal however in both options of margin if you can figure it out then you're going to want a whole bunch of these questions because there's no way to really trick you right so what I mean by that is if you can do the initial setup now customer buyes a th000 shares at 40 makes the required deposit so you should be able to say okay that's $40,000 in Securities uh we're going to loan him 20,000 that's the debit register Equity is 20 that's what he needs to deposit that's going to be called his Margin Call the call for initial money now we really don't tell customers this but you know under reg te customers get two additional days to come up with this $20,000 right so if if I'm a margin clerk T plus2 is between broker dealers customers get two additional days so I can't really you know bother them until t plus2 plus two you know whether you want to think of that as t plus4 or you want to think that two days after settlement however however you want to think about they go Hey where's your 20 grand you know now if you're cust from good standing I may get you an extension you know then I give you a mail gram you flake where's your money and let's say I sell you out and so by the time I sell you out that stock is a $50 stock so you bought a th shares of 40 I sold you out at 50 you never paid for the buy so I say you free riter you you took a free ride a ride you did not pay for now I have to send them the $110,000 profit in this example but then I'm going freeze his account for 90 days and say listen for the next 90 days you have no credit privileges what's Frozen is not the ability to trade the account what's Frozen is the credit privileges we have very liberal credit privileges at a broker so if you violate our already liberal credit privilege it's going to be a problem all right so that's our classical margin equation and I said we just did an initial setup where we bought a th000 shares at 40 customer made the required deposit 40,000 minus 20,000 equals 20,000 in equity again I realize this is a podcast you may be listening in the gym driving to work you know who knows maybe you're watching it on the YouTube channel who knows and I get that uh uh if you want to see Ledger entries and marks you can do two things you can watch the lecture I'm going to pen and put in the video description you go also on the channel search bar can just inter margin and see all kinds of practice questions that I've helped people out individual practice questions and you can also watch tutoring replay so there's a lot of that I'm trying to keep it pretty simple in this podcast uh Series so stock goes to 50 in this case the customer did make the required deposit he still has the thousand shares I did not sell him out and so now we're going to do what's called a mar Mark to Market a mark to Market so now there's $50,000 in secur uh market value Securities the mortgage the debit balance is still 20 you have $30,000 in equity again the best analogy is the house right if the house goes up the market value of the house goes up the mortgage Remains the Same you know and sometimes they like to ask you what Ledger entries are affected based on certain Market action and please note here the debit register wasn't altered but you now have in this example $30,000 in equity I say listen you only need to be at risk for half of 50 which is 25 that's reg te 50% of uh you know that 50,000 is 25 you have 30 you have 5,000 in excess Equity more than you need for customers like you that pick stocks that go the right direction we're willing to advance you a first their loan would you like $5,000 in cash or would you like to buy additional Securities with $5,000 in excess Equity you have $10,000 in buying power and you say well Dean do I have to do something today I say no if I told you you had to do something today you might use this in a way that's not in your best interest so I say I tell you what I'm going to do I'm going to make a special memorandum to your account that on today you had $5,000 more than you needed now for test purposes I don't think you'd have any problem on the exam thinking of excess equity and SMA is the same thing they're not actually the SMA is the holding tank for the excess Equity so you say Hey Dean uh I like it at 40 I'm glad that it's at 50 but 50 is a little Rich for me so I don't feel like increasing my proportion ownership today like it a 40 don't like it at 50 I say I totally understandable tell you what I'll make a special memorandum to your account stock goes back to 40 and I say hey you said you liked it at 40 and it's back at 40 go damn I don't have any excess Equity I said you're correct you don't with the stock back at 40 40 minus 20 is 20 aren't you glad I made that special memorandum to your account you still have $5,000 you can have as cash and you can still buy $10,000 worth of additional Securities so two times the SMA is the buying power now more often than not the test questions aren't about good news now Leverage is financial speed you're making money twice as fast so in my example we bought a th000 shares at 40 stock went to 50 if you did that in your cash account you put up 40 Grand and you made 50 you know it's 50 and you know you sell you made $10,000 and if you buy a th000 shares in your margin account at 40 and you sell at 50 you made $10,000 but in your cash account you put up 40 to make the 10 that's a 25% return that's decent for sure but in your margin account you only put up 20 to make the 10 you've made 50% so leverages Financial speed now what we need to make sure the customer understands is that the same supercharg speed they make money with it's the same supercharg speed they're going to lose money with you say well D this is all great fun but you know isn't there bad news at some point I say okay well yeah to maintain your account you always need to have a minimum of 25% of the market value in equity now remember house requirements can always be more stringent you know I don't know of any broker firm that doesn't have a house requirement that is more than 25 but that would be the minimum you see how far down could my account go before there would be a problem I said well gee why you s have negative energy like that I said well uh I can figure that out I take the debit register market value uh at maintenance is debit by 75 now be careful you know in our simple margin account we're kind of using for illustrating this podcast episode we bought a th000 shares at 40 we made the required deposit be careful what you're being asked you know and that example if I ask you what is minimum maintenance You' take 25% of 40 and you'd say minimum maintenance is $10,000 different question if I ask you how far down the account could go before there would be a problem that's market value maintenance and we would take our debit register 20,000 we would divide by 75 and we come up with 26666 sign of the devil I say listen if this stock goes below $26.66 there's a th000 shares here or 26,000 market value goes below 26,6 66 you're going to have a maintenance call you know maintenance calls are due promptly unless you have a portfolio margin account uh if I'm a margin Clerk and you owe the broker dealer money any cash from stocks cash dividends from stocks or interest from bonds will be used to pay down the debit balance right so if I'm a margin clerk you have a debit balance with the broker term cash comes into your account I'm going to pay down the loan if you don't want the margin Department to do that the margin clerk to do that well then you got to expressly say Dean you know don't pay down the loan now remember if I pay down the loan that means Equity would go up all right so in most businesses when you sell things you don't own when you sell things you don't own it's called fraud but not in our business you can sell things you don't own that's called selling Short Selling Short Selling borrowed Securities so whether I want to borrow money or borrow Securities I need a margin account and let's say I call my broker and I say I'd like to borrow a th000 shares of SeaWorld and they say Dean let's call stock loan and see if we have a customer who signed a loan consent form that has 8,000 shares of SeaWorld in their account there is a locate requirement this is called regulation show sh short locate requirement they say de we were able to locate a th000 shares of SeaWorld I say sell it short and let's assume SeaWorld is a $50 stock so I'm going to get 50 Grand from selling the borrowed stock but remember reg T says I have to put up half so I'm gonna have to put up 25 Grand so the credit register that's the cash the credit a register is $75,000 so that's the cash minus the short market value in this case 50,000 equals Equity so that is our classical short equation credit register minus short market value equals Equity remember the classical margin equations are important by the way when I say classical margin equation or classical balance sheet equation that just means we assume everybody knows that right so we assume everybody knows it you should be able to recognize that a as a standalone kind of test question you know the classical short equ margin equation can best be described as and you got to pick it out of the lineup so to speak right anyways uh back to this we got our initial setup remember reason we said this is important is we want to be able to do the initial and then we want to be able to do what's called a mark to Market so here I'm bearish on SeaWorld right you know uh so you know I'm hoping bad news you know uh maybe one of the orcas Chomps on a drainer that would be good news for me and the stock as a result drops to you know 40 right I'm hoping to sell high and buy low so that's what I'm hoping and as I said before more often than not more often than not it's not the good news that you sell short and the stock goes down you know it's the bad news you know as I always say in all my you know lectures as a results being a bear I say don't be a dumb bear you know you should definitely be able to recognize that when you sell short Securities you have unlimited risk you say well Dean what is minimum maintenance on a short position I say well minimum maintenance on a short percent position is 30% so you need 30% of the short market value so my example uh I sold short a th000 shares a sea to 50 30% of that is 15,000 right now I don't have any problem because you know I'm I don't have a problem right now now again be careful what you're being asked you know I always express this to test takers is rtfq read the full question make sure you are distinguishing between asked about what is minimum maintenance and what is market value at maintenance those are different questions right so you know Mark of minimum maintenance is 30 now remember house requirements can always be more stringent more stringent they just can't be more lenient I don't know if any firm that does it you well Dean how far up could see where go before there would be a problem oh that was on my Series 7 I'm GNA take the market value excuse me market value main going take the credit in this case 75 grand that's where most people get on where the 75 grand come from 50 Grand from selling the stock I didn't own plus the 25 I had to put with it that's $75,000 I divide by 1.3 I'll just get my calculator right here and 75 ,000 divide 1.3 if uh SeaWorld the stock goes upes a th000 shares per share it goes above $576 a share you're going to have a problem if it goes in market value in total that goes above $ 57,6 192 you're going to have a problem and again if you want to do Ledger injuries and see the math on a whiteboard like I said just you know go on the channel and do that so that means it's very important to consider risk mitigation uh particularly in a short stock position you know in a short stock position you might want to consider two uh risk mitigation strategies we have two areas in in our quiver and as I say you know don't be a dumb bear you know and so if you don't want to be a dumb dare you could buy a protective call you could establish the choice to buy back the borrowed stock at a set price at any time between now and some future date very very important to know that hedging right on a long stock you would buy a put here the other thing you can do maybe you're not approve for options for example the other thing you could do is enter a buy stop order to stop the loss so you know let's put in a buy stop at cworld at uh let's put in a buy stop at uh 57 and at that point I'm going to go home right I'm going to stop the losses stop the bleeding you know we at some point we got to ad admit this is not a flower it's a weed and needs to be pulled now the equivalent on the long stock would be a sell stop right so I would know risk mitigation by the way is way more important in short account because of the unlimited risk but risk mitigation for the short stock position would be buy a call then you no longer have unlimited risk or enter a buy stop order to stop the loss I would also mitigation in a long account however not as testable but that would be the opposite right we'd either buy a put or inent or a sell stop okay so I hope you uh found these uh these are finding the podcast series uh helpful episode 9 will be customer counts we're trying to bring these in about 30 minutes and I will again link to the full-blown lectures on margin uh for you in the video description and the pin comment uh remember inch by inch your Series 7 is a CCH and yard by yard your Series 7 is hard and I'll see you for episode nine uh customer accounts