Margin Accounting (Long, Short, Day Traders) – Series 7 Exam

📊 Margin Accounting (Long, Short, Day Traders) – Series 7 Exam Guide
Mastering the Rules of Margin for Success on Exam Day

Margin accounts are a core concept tested heavily on the Series 7 Exam. Whether customers are buying long, selling short, or actively day trading, you need a clear understanding of how margin works, how it’s calculated, and what the regulatory requirements are.

📈 Margin for Long Positions (Buying on Margin)

Buying on margin means the customer borrows part of the purchase price from the broker-dealer.
Key facts you must know:

• Minimum Initial Requirement:
  • If the purchase is $2,000 or less, the customer must deposit 100%.
  • If the purchase is over $2,000, the customer must deposit the greater of $2,000 or 50% of the purchase price.
• Maintenance Requirement:
  • After the trade, the customer must maintain at least 25% of the market value in equity at all times.
  • If equity falls below 25%, a margin call occurs.

📉 Margin for Short Positions (Short Selling)

Selling short involves selling borrowed securities and hoping to buy them back cheaper later.

• Minimum Initial Requirement:
  • Minimum deposit is $2,000, regardless of transaction size.
  • The customer must deposit the greater of $2,000 or 50% of the short sale proceeds.
• Maintenance Requirement:
  • Must maintain at least 30% of the current market value (or higher for low-priced stocks).

⚡ Margin for Pattern Day Traders

Pattern Day Trader (PDT):
A customer who executes 4 or more day trades within 5 business days, if the number of day trades is more than 6% of total trades.

Special rules for PDTs:

• Minimum Equity Requirement:
  Must maintain at least $25,000 equity in the account at all times.
• Buying Power:
  Day traders can trade up to 4 times their maintenance margin excess.
• Margin Calls:
  If equity falls below $25,000, the account is restricted until the customer deposits funds.

🔢 Key Terms to Understand

• Regulation T:
  Federal Reserve Board rule requiring 50% initial deposit for margin trades.
• House Maintenance:
  Broker-dealers may require higher standards than the regulatory minimum.
• Margin Call:
  A demand for additional funds when equity falls below maintenance levels.
• SMA (Special Memorandum Account):
  Represents excess equity that can be borrowed for new purchases.

🧠 Common Series 7 Exam Traps

• Know when $2,000 minimum rules override the 50% Regulation T rule.
• Remember the 30% maintenance for short positions (not 25%).
• Watch for questions about day trading minimum equity ($25,000 rule).
• Expect questions calculating how much equity is needed after price changes.

🎯 Prepare to Excel

Mastering margin accounting is critical not just for passing Series 7, but also for helping clients manage risk properly.

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