FINRA Series 7Opens Accounts and Evaluates Customer ProfileHard
A customer opens a margin account and purchases 200 shares of ABC stock at $100 per share, depositing the Reg T required margin of 50%. The stock later rises to $120 per share. How much Special Memorandum Account (SMA) is generated as a result of this price increase?
- A$4,000
- B$10,000
- C$2,000
- D$1,000
Show answer & explanationAnswer & explanation
Correct answer: C. $2,000
Initial purchase: 200 shares × $100 = $20,000 market value; Reg T 50% requires $10,000 equity and $10,000 debit balance. After the price rise to $120, market value = 200 × $120 = $24,000, an increase of $4,000. SMA is generated at 50% of the increase in market value (the Reg T rate), so SMA = 50% × $4,000 = $2,000.
Why the other options are wrong
- A. $4,000 is the full increase in market value, not the SMA generated (only half is released).
- B. $10,000 is the original equity/debit amount, not the SMA generated from appreciation.
- D. $1,000 would be 25% of the increase, not the applicable 50% Reg T rate.
SMA (Special Memorandum Account)
A line of credit in a margin account that accumulates when the market value of securities rises, equal to 50% (Reg T rate) of the increase in equity.
- Generated when securities appreciate in a margin account
- Equals Reg T percentage (50%) of the increase in market value
- Can be withdrawn as cash or used to buy more securities without adding new funds
Memory trick: Stock goes up, SMA banks half the gain.