← Margin Accounts – Series 7 Exam Flashcards

Series 7 General Securities Representative Exam Study Guide

Key concepts, definitions, and exam tips organized by topic.

22 cards covered

Margin Accounts – Series 7 Exam Study Guide


Overview

Margin accounts allow investors to borrow funds from broker-dealers to purchase securities, using those securities as collateral. The Series 7 exam tests your ability to calculate margin requirements, identify restricted accounts, and understand the regulatory framework governing margin lending. Mastery of Regulation T, maintenance requirements, and SMA calculations is essential for exam success.


---


Section 1: Margin Account Basics


What Is a Margin Account?

A margin account is a brokerage account in which the broker-dealer lends the customer a portion of the purchase price of securities. The securities serve as collateral for the loan.


Key Requirements to Open a Margin Account


| Requirement | Amount/Detail |

|---|---|

| Minimum equity to open | $2,000 (or full cost if purchase < $2,000) |

| Regulation T initial deposit | 50% of purchase price |

| Maximum broker-dealer loan | 50% of market value |


> Note: The $2,000 minimum comes from FINRA rules and applies before Regulation T calculations. If a customer buys $1,500 of stock, they must deposit the full $1,500 — not just 50%.


The Margin Agreement – Three Key Documents


| Document | Purpose |

|---|---|

| Credit Agreement | Outlines interest terms on the borrowed funds |

| Hypothecation Agreement | Customer pledges securities as collateral; grants broker-dealer right to rehypothecate |

| Loan Consent Agreement | Allows the firm to lend the customer's securities to other parties (e.g., short sellers) |


Key Terms

  • • Regulation T – Federal Reserve Board rule requiring a 50% initial margin deposit on equity securities
  • • Hypothecation – Pledging securities as collateral without transferring ownership
  • • Rehypothecation – The broker-dealer re-pledging the customer's securities to a bank to finance the customer's loan
  • • Restricted Account – A margin account where equity has fallen below the 50% Regulation T requirement (debit balance exceeds 50% of market value)

    • Watch Out For

    > ⚠️ Common Pitfall: The $2,000 minimum deposit is a floor, not a substitute for Reg T. If a customer buys $10,000 of stock, they must deposit $5,000 (50%), not just $2,000.


    > ⚠️ Common Pitfall: The loan consent agreement is optional — a customer can decline to allow the firm to lend their securities. The credit and hypothecation agreements are required to open a margin account.


    ---


    Section 2: Regulation T & Margin Calls


    The Regulation T Formula


    ```

    Purchase Price × 50% = Required Customer Deposit (Reg T Call)

    Purchase Price × 50% = Maximum Broker-Dealer Loan

    ```


    Example: Customer buys $20,000 of stock

  • • Customer deposits: $20,000 × 50% = $10,000
  • • Broker-dealer lends: $10,000 (the debit balance)

    • Margin Call Timeline


    | Event | Timeframe |

    |---|---|

    | Reg T margin call issued | Day of purchase (T) |

    | Customer must meet margin call | 2 business days (by T+2 settlement) |

    | Failure to meet call → broker liquidates | Immediately upon failure |

    | Account freeze after failure | 90 days (cash up front required) |


    Restricted Accounts & the Retention Requirement

    When equity falls below 50% of market value, the account becomes restricted:

  • • No new purchases without depositing additional funds
  • • Retention requirement: If the customer sells securities, 50% of sale proceeds must remain in the account
  • • The customer may only withdraw the other 50%

    • ```

    Retention Requirement = 50% of sale proceeds must stay in account

    ```


    Key Terms

  • • Debit Balance – The amount the customer owes the broker-dealer (the loan)
  • • Equity – Market Value − Debit Balance
  • • Restricted Account – Equity < 50% of market value
  • • Retention Requirement – 50% of proceeds from sales in a restricted account must be retained

    • Watch Out For

    > ⚠️ Common Pitfall: A restricted account is NOT the same as a maintenance call. A restricted account simply means you can't make new purchases freely — it does not automatically trigger a sell-out.


    > ⚠️ Common Pitfall: The 90-day freeze applies when a customer fails to meet a Reg T call — not just because the account is restricted.


    ---


    Section 3: Maintenance Margin


    Long Account Maintenance Requirements


    | Requirement Level | Equity % |

    |---|---|

    | FINRA minimum (long) | 25% of market value |

    | Typical "house" requirement | 30% of market value |


    The Critical Formulas


    Equity Calculation:

    ```

    Equity = Market Value − Debit Balance

    Equity % = Equity ÷ Market Value

    ```


    Maintenance Call Amount:

    ```

    Maintenance Call = Required Equity − Actual Equity

    Required Equity = Market Value × 25%

    ```


    Maintenance Call Trigger Point (Long Account):

    ```

    Market Value Trigger = Debit Balance ÷ (1 − Maintenance %)

    = Debit Balance ÷ 0.75

    ```


    Example – Trigger Point:

  • • Debit balance = $30,000
  • • Trigger: $30,000 ÷ 0.75 = $40,000
  • • If market value falls to $40,000, a maintenance call is issued

    • Example – Maintenance Call Calculation:

  • • Market value = $16,000 | Debit balance = $14,000
  • • Actual equity = $16,000 − $14,000 = $2,000
  • • Required equity = $16,000 × 25% = $4,000
  • • Maintenance call = $4,000 − $2,000 = $2,000

    • Key Terms

  • • Maintenance Margin – The minimum equity percentage a customer must maintain in a margin account at all times
  • • Maintenance Call (Margin Call) – A demand for additional funds when equity falls below the maintenance minimum
  • • House Requirement – A broker-dealer's internal requirement, which may be stricter than FINRA minimums

    • Watch Out For

    > ⚠️ Common Pitfall: The exam may ask you to use either 25% (FINRA) or 30% (house). Read the question carefully to determine which applies.


    > ⚠️ Common Pitfall: Don't confuse a maintenance call (triggered when equity is too low) with a Reg T call (triggered by a new purchase). They have different thresholds and timelines.


    ---


    Section 4: Special Memorandum Account (SMA)


    What Is SMA?

    SMA (Special Memorandum Account) is a line of credit that accumulates when a long margin account's equity exceeds the Regulation T 50% requirement. It represents excess equity and can be used to:

  • • Purchase additional securities (without a new cash deposit)
  • • Withdraw as cash

    • How SMA Is Created & Used


    ```

    SMA = Excess Equity × 50%

    (For every $1 of appreciation above Reg T, SMA increases by $0.50)


    Example: Market value rises $10,000

    → SMA increases by $10,000 × 50% = $5,000

    ```


    Critical SMA Rule

    | SMA Behavior | Rule |

    |---|---|

    | Market value rises | SMA increases by 50% of appreciation |

    | Market value falls | SMA does NOT decrease |

    | SMA is used (purchase/withdrawal) | SMA decreases by amount used |


    > SMA is a memorandum entry — it is a running credit balance that only decreases when actually utilized, not when the market moves against the customer.


    Key Terms

  • • SMA – Excess equity line of credit in a margin account; 50% of appreciation above Reg T requirement
  • • Excess Equity – The amount by which account equity exceeds the Reg T 50% requirement
  • • Buying Power – SMA × 2 (since Reg T is 50%, $1 of SMA can support $2 in new purchases)

    • Watch Out For

    > ⚠️ Common Pitfall: SMA does not go down when stock prices fall. Many students assume it tracks the market — it does not. Once generated, SMA stays until used.


    > ⚠️ Common Pitfall: Using SMA to buy new securities does not eliminate a maintenance margin problem if the account is near the maintenance threshold.


    ---


    Section 5: Short Selling in Margin Accounts


    Short Sale Mechanics

    A short sale involves borrowing shares, selling them in the open market, and hoping to repurchase (cover) them at a lower price. The profit is the difference between the sale price and the lower repurchase price.


    ```

    Short Sale Profit = Sale Price − Repurchase Price

    Short Sale Loss = Repurchase Price − Sale Price (potentially unlimited)

    ```


    Short Account Margin Requirements


    | Requirement | Percentage |

    |---|---|

    | Reg T initial margin (short) | 50% of market value of shorted securities |

    | FINRA maintenance margin (short) | 30% of current market value |


    > Note: Short accounts use 30% maintenance (vs. 25% for long accounts) — the higher requirement reflects the greater risk of short positions.


    Short Account Equity Dynamics


    | Market Moves | Effect on Short Seller |

    |---|---|

    | Stock price falls | Equity increases ✅ (favorable) |

    | Stock price rises | Equity decreases ❌ (adverse) |


    Why unlimited loss potential? A stock's price can theoretically rise to infinity, meaning the cost to cover the short position has no ceiling.


    SEC Rule 201 – The Alternative Uptick Rule


    | Trigger | Restriction |

    |---|---|

    | Stock declines ≥10% from prior day's close | Short sale restriction (SSR) activated |

    | Duration | Remainder of that trading day + next full trading day |

    | Restriction | Short sales may only be executed at a price above the current national best bid |


    Key Terms

  • • Short Sale – Selling borrowed securities with the obligation to return them later
  • • Cover (Buy to Cover) – Repurchasing shorted shares to close the position
  • • Short Sale Restriction (SSR) – SEC Rule 201 circuit breaker triggered by a 10% intraday price decline
  • • Uptick Rule – Historical rule requiring short sales only on price upticks; Rule 201 is the modern alternative version

    • Watch Out For

    > ⚠️ Common Pitfall: Short account maintenance is 30%, not 25%. Long = 25%, Short = 30% — this is a frequent trap on the Series 7.


    > ⚠️ Common Pitfall: The short sale proceeds stay in the account as collateral — the customer does NOT receive the cash from the short sale to use freely.


    > ⚠️ Common Pitfall: Rule 201 is triggered by a 10% decline from the prior day's closing price, not an intraday high.


    ---


    Quick Review Checklist


    Use this before exam day to confirm mastery of all key concepts:


    Account Basics

  • • [ ] Minimum equity to open a margin account = $2,000
  • • [ ] Reg T initial requirement = 50% of purchase price
  • • [ ] Margin agreement includes 3 documents: credit agreement, hypothecation agreement, loan consent agreement
  • • [ ] Hypothecation = pledging securities as collateral; rehypothecation = broker re-pledging them

    • Regulation T & Calls

  • • [ ] Can calculate the Reg T margin call: Purchase Price × 50%
  • • [ ] Customer has 2 business days to meet a Reg T call
  • • [ ] Failure to meet Reg T call → broker liquidates + 90-day freeze
  • • [ ] Restricted account = equity < 50% of market value; 50% retention on sales

    • Maintenance Margin

  • • [ ] Long account FINRA minimum = 25%; house minimum commonly = 30%
  • • [ ] Can calculate maintenance call: Required Equity − Actual Equity
  • • [ ] Can calculate trigger point: Debit Balance ÷ (1 − Maintenance %)
  • • [ ] Short account FINRA minimum = 30%

    • SMA

  • • [ ] SMA = excess equity line of credit created when equity > 50%
  • • [ ] SMA increases by 50% of appreciation above Reg T
  • • [ ] SMA does NOT decrease when market value falls
  • • [ ] Buying power = SMA × 2

    • Short Selling

  • • [ ] Short Reg T = 50%; short maintenance = 30%
  • • [ ] Rising stock price = adverse to short seller (equity decreases)
  • • [ ] Short loss potential = theoretically unlimited
  • • [ ] Rule 201 triggered by ≥10% decline from prior close; restricts short sales above national best bid for remainder of day + next trading day

    • ---


    Good luck on the Series 7! Focus on the formulas, know your percentages cold (50%/25%/30%), and always read carefully to distinguish between Reg T calls and maintenance calls.

    📝

    Take a Practice Test

    Test yourself with multiple choice questions
    📇

    Study with Flashcards

    Flip through all 22 cards

    Want more study tools?

    Subscribe for $7.99/mo and turn your own notes into personalized flashcards and study guides.

    View Pricing