FINRA Series 7Investment Information and Suitable RecommendationsHard
A customer buys 200 shares of ABC stock at $50 per share in a margin account, depositing the Regulation T required 50% margin. The stock later rises to $70 per share. Assuming no further transactions, how much Special Memorandum Account (SMA) has been generated?
- A$4,000
- B$7,000
- C$1,000
- D$2,000
Show answer & explanationAnswer & explanation
Correct answer: D. $2,000
Initial market value = 200 × $50 = $10,000; debit balance = 50% = $5,000. When the stock rises to $70, new market value = $14,000, and equity = $14,000 − $5,000 = $9,000. Excess equity above the 50% Reg T requirement on the new value ($7,000) is $9,000 − $7,000 = $2,000, which becomes SMA. Equivalently, SMA equals 50% of the market value increase: 50% × ($14,000 − $10,000) = $2,000.
Why the other options are wrong
- A. Incorrect — this is the full dollar increase, not 50% of it.
- B. Incorrect — this is total equity, not the SMA generated.
- C. Incorrect — this understates the increase in equity available.
Special Memorandum Account (SMA)
SMA is a line of credit generated in a margin account when the market value of securities rises, representing excess equity beyond the Reg T requirement that the customer may withdraw or use to buy more securities.
- SMA = 50% of any market value increase in a Reg T (50%) account
- SMA is a credit line, not cash, and does not reduce automatically if prices later fall
- Can be used to purchase more securities or withdrawn as cash, subject to margin rules
Memory trick: Stock goes up, half the gain becomes 'store credit' (SMA).