FINRA Series 7Processes and Confirms TransactionsHard
A customer's margin account currently has $6,000 of SMA (Special Memorandum Account) and no margin call outstanding. If the customer wishes to purchase additional stock using only the SMA as buying power, what is the maximum dollar value of stock the customer can purchase without depositing additional cash?
- A$12,000
- B$6,000
- C$3,000
- D$9,000
Show answer & explanationAnswer & explanation
Correct answer: A. $12,000
SMA represents excess equity that can be used as the Reg T margin deposit for a new purchase. Since Reg T requires 50% margin, SMA provides leveraged buying power of double its value: $6,000 × 2 = $12,000 of stock can be purchased using SMA alone to satisfy the 50% requirement.
Why the other options are wrong
- B. This equals the SMA itself, not the leveraged purchasing power.
- C. This is only half of the SMA value, not its buying power.
- D. This undercalculates by using a 67% margin rate instead of 50%.
SMA Buying Power
Special Memorandum Account (SMA) reflects excess equity in a margin account that can be used to purchase additional securities without new cash, with buying power equal to double the SMA under Reg T.
- SMA is a credit line, not actual cash
- Buying power = SMA × 2 (since Reg T requires 50%)
- SMA is created when equity exceeds Reg T requirement, e.g., from price appreciation or dividends
Memory trick: SMA doubles up — buying power to gear up.