FINRA Series 7Processes and Confirms TransactionsHard
A customer purchases 1,000 shares of ABC stock at $40 per share in a margin account, depositing the required Reg T margin. The stock later rises to $50 per share with no change in the debit balance. How much SMA is generated by this price appreciation?
- A$5,000
- B$20,000
- C$2,500
- D$10,000
Show answer & explanationAnswer & explanation
Correct answer: A. $5,000
Initial debit balance = 50% × $40,000 = $20,000. At $50/share, market value = $50,000, so equity = $50,000 − $20,000 = $30,000. Reg T requirement on current value = 50% × $50,000 = $25,000. Excess equity (SMA) = $30,000 − $25,000 = $5,000, equal to 50% of the $10,000 price appreciation.
Why the other options are wrong
- B. This equals the original debit balance, unrelated to the SMA calculation.
- C. Understates the SMA; miscalculates the appreciation percentage.
- D. This equals the full dollar appreciation, not the SMA generated (only half of appreciation becomes SMA).
SMA Generation from Appreciation
In a Reg T margin account, when a fully margined long position appreciates, 50% of the price increase becomes available as SMA (Special Memorandum Account).
- SMA = excess equity above the current Reg T requirement
- For long positions, SMA generated = 50% of price appreciation
- SMA can be withdrawn as cash or used as buying power
Memory trick: Stock goes up, half the gain becomes spendable SMA.