Exam math
Margin accounts: the numbers behind the questions
Enter what was bought on margin and what it is worth today: equity, the loan and the value at which a maintenance call starts.
Long margin account
Equity
$6,000
| Deposit required (Reg T 50%, $2,000 minimum) | $10,000 |
| Debit balance (loan) | $10,000 |
| Equity / market value | 38% |
| Maintenance call below | $13,333 |
The 25% minimum is FINRA Rule 4210; many firms set a higher house requirement.
A margin account lets a customer buy securities partly with money borrowed from the broker-dealer, and two rules set the numbers the Series 7 asks about. Regulation T of the Federal Reserve sets the initial requirement: the customer deposits 50% of the purchase price of marginable stock (12 CFR 220.12), and FINRA Rule 4210 adds a minimum equity of $2,000 to open the account. The firm lends the rest, which becomes the debit balance. Equity is the market value minus the debit. Once the account is open, Rule 4210 requires the equity of a long account to stay at 25% of the market value or more (FINRA Rule 4210); below that, the firm issues a maintenance call. For a purchase of $20,000 with $10,000 deposited, the debit is $10,000, a fall to $16,000 leaves $6,000 of equity, and the call starts below a market value of $13,333, the debit divided by 75%. Firms often set stricter house requirements.
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Practice questions written by Radif Partners from the official outline topics. They are not questions from the real exam. Progress is kept in this browser only (local storage) and never sent.
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One account, as the price falls
| Market value | Debit | Equity | Equity / value | Under 25%? |
|---|---|---|---|---|
| $20,000 | $10,000 | $10,000 | 50% | no call |
| $18,000 | $10,000 | $8,000 | 44% | no call |
| $16,000 | $10,000 | $6,000 | 38% | no call |
| $14,000 | $10,000 | $4,000 | 29% | no call |
| $13,000 | $10,000 | $3,000 | 23% | call |
The debit does not move when the price moves: it is a loan, and it changes only when the customer pays it down or borrows more (interest aside). All the market risk lands on the equity, which is why a fall of a third in the stock price can wipe out two thirds of the customer's money in this example.
The formulas
- Initial deposit: purchase × 50% (Regulation T), never less than $2,000 unless the purchase itself is smaller.
- Debit balance: purchase minus deposit.
- Equity: current market value minus debit.
- Maintenance call value: debit ÷ (1 − 25%), that is debit ÷ 0.75.
- Excess equity (to SMA): equity minus 50% of current market value, when positive.
How the exams test margin
The Series 7 outline places margin in the order and transaction function, where the customer's instructions are processed and settled, and in the account opening function, where the margin agreement and the hypothecation agreement are signed (Series 7 outline). Expect one or two calculations, usually equity or the call value, and several questions on the documents and the definitions. The SIE stays at the level of vocabulary: what a margin account is, who lends, and why it carries more risk than a cash account.
Documents of a margin account
A margin account needs a signed margin agreement, which includes the hypothecation agreement letting the firm pledge the securities as collateral for the loan. A loan consent form, allowing the firm to lend the customer's securities to others, is optional. The customer must also receive the risk disclosure the rules require before trading on margin.
Linked practice
The five questions above come from the order and transaction function of the Series 7. The orders and transactions page practices the whole function, and the options page covers the other calculation-heavy part of the exam.
A worked question, step by step
A customer buys $30,000 of stock in a new margin account and the stock later rises to $36,000. The deposit was $15,000 under Regulation T, so the debit is $15,000. At $36,000, equity is $21,000. The Regulation T requirement on the new value is $18,000, so the account has $3,000 of excess equity, credited to the special memorandum account. The customer could withdraw that amount, or use it to buy twice as much stock on margin, $6,000, without depositing more. Questions of this kind usually test one step at a time, so write down the debit before anything else.
The opposite case appears too: when the market value falls, equity drops first, then excess equity disappears, and the account becomes restricted once equity is below the Regulation T requirement. A restricted account is not yet a maintenance call; the call comes only below the 25% level, and the calculator above shows where that line sits.