FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client wants to purchase 100 shares of XYZ stock at $80 per share in a margin account. The initial margin requirement is 50%, and the maintenance margin is 30%. If the stock price drops to $60 per share, what is the equity in the account?
- A$3,000
- B$2,000
- C$4,000
- D$5,000
Show answer & explanationAnswer & explanation
Correct answer: B. $2,000
Equity is calculated as the current market value of the securities minus the debit balance. The debit balance remains constant unless there are margin calls or additional deposits/withdrawals.
Why the other options are wrong
- A. This would be the equity if the stock dropped to $70 ($7,000 - $4,000 = $3,000).
- C. This is the initial equity in the account ($8,000 * 0.50 = $4,000).
- D. This is incorrect. The equity decreases as the stock price falls.
Margin Account Equity (Long)
For a long position in a margin account, equity is the current market value of the securities minus the debit balance (the amount borrowed from the broker).
- Equity fluctuates with the market value of the securities.
- Debit balance remains constant unless adjusted.
- Used to determine if a margin call is triggered.
Memory trick: Equity is what's left after you pay off your loan, no matter how the stock moves.