About Margin

How does a Margin Account Work? First, the proper account applications and margin agreements must be completed, signed, returned to Joseph Grace where your account must be approved for margin. Margin agreements outline the terms of your margin account. The amount you are required to deposit in your account is called margin, the amount you borrow is called the debit balance. Interest is charged on the debit balance.



What is a Margin Agreement? In order for a customer to have a margin account the customer must complete and sign a Margin Agreement. The Margin Agreement involves three separate sub-agreements:   Credit Agreement – An acknowledgement by the customer that you are borrowing funds from the clearing firm. Hypothecation Agreement – When you borrow on margin the clearing firm deposits your securities as collateral with a bank to secure the funds they will lend to you. The Hypothecation Agreement states that you, the customer pledges, hypothecates, your securities to the clearing firm, and in addition gives the right to the clearing firm to re-hypothecate the securities to secure a bank loan. Loan Consent Agreement – This agreement gives the right to lend the securities to finance the margin.


What should I know prior to borrowing on margin? There are two methods of payment for transactions either in cash or by borrowing a portion of the purchase from a broker dealer. Borrowing a portion of the purchase occurs in a margin account. Here are some points to remember about margin:

ü When borrowing on margin, interest is charged to your account based on the amount you have borrowed. Interest is calculated on a daily basis and booked to your account on a monthly basis. Interest rates may change without notice. ü Not all securities are eligible for margin. ü Of the securities that are eligible for margin, you may not be able to borrow the same amount for one security as another. There are two types of margin requirements, which are the risk of margin:

Initial margin is the amount of value to be deposited into your account to cover your purchase. The deposit may be cash fully paid for margin accounts. Maintenance margin is the value that must be deposited into your account due to a decrease in value of your purchase. The deposit may be cash fully paid for margin accounts. The Securities & Exchange Commission regulates margin or the extension of credit by a broker dealer to a customer, the Exchanges, clearing organization and the Federal Reserve Bank.


What are the Margin Requirements? The Initial Minimum Margin requirement is $2,000 or 50% of the purchase price of eligible securities bought on margin (whichever is higher) or 50% of the proceeds of short accounts. The Maintenance Margin requirement is 25% of the current Long Market Value and a minimum of $5 per share or 30% of the Short Market Value.


What is the Current Margin Rate? Broker Call + (1) one point. Actual rate changes without notice.


What is a Long Margin Account? At the close of business each day your positions in your account are marked to the market (valued at the current market value), this is called your Long Market Value. The Debit Balance in your account is the original amount you borrowed on the purchase of your positions. The equity in your account is the value in the account that belongs to you. Equity equals the Account Long Market Value less the Debit Balance. When your equity is greater than the margin requirement you have excess equity. This is usually achieved by a long market value increase. When the long position in your account increases in value it creates additional Loan Value. Loan Value is the maximum amount the clearing firm can lend you on the securities. Special Memorandum Account (SMA) is an account used to record the excess funds in a margin account, additional deposits made by you, dividends, interest and the proceeds of security sales. The SMA balance decreases if you use it to make additional purchases or if you withdraw the SMA as cash.


What does Buying Power mean? Buying power is the amount of securities you can purchase on margin based on your excess margin or SMA.   What is a Maintenance Call? The risk of purchasing on margin is if or when the securities in you account decrease to a level that would require an additional deposit to have adequate margin in your account to support your debit balance. Or if the equity in general falls to an amount below which is required. In this case you will be issues a maintenance call for the amount of value required to put your account in margin compliance. A maintenance margin call can be met by depositing cash, or other fully paid margin eligible securities. Note: A margin account has the ability to excel losses and/or gains in your account. The acceleration of losses could require additional funding to your account, which must be made by the account holder. If the required funding is not met in the time period required, the securities in the account may be sold at a loss without your consent.


When Does a Margin Account become restricted? A margin account becomes restricted when the equity falls below the required initial margin requirement. When an account becomes restricted additional purchase(s) can be made by depositing the required margin for that purchase. If you sell securities in a restricted account, your debit balance will be reduced by the proceeds received in the sale. If an account is not properly maintained, securities could be sold to bring the account within compliance.


What is a Short Account? This account is for short sales. Depositing the required cash or margin eligible securities with a loan value equal to the margin requirement may satisfy margin requirements.


What is does the Margin Department do? The margin department ensures that customers are in compliance with margin rules and regulations, monitors the lending and delivery of transactions, and enforces the rules regarding payment and short sales.