Margin Accounts and the Series 7 Exam - dummies

By Steven M. Rice

Instead of paying for securities in full, investors may buy (or sell short) certain securities on margin. Margin accounts are ones in which the broker-dealer covers a percentage of the securities purchased by investors. The good news is that it gives investors leverage to purchase more securities than they might without margin accounts. In turn, that means a larger commission or markup for you, the registered rep.

Margin isn’t a huge topic on the Series 7 exam, but you can score some quick points if you’re familiar with its nuances and the math.

Practice questions

  1. A margin loan consent form

    A. allows the broker-dealer to provide a loan to the customer

    B. allows the broker-dealer to loan a customer’s margined securities to other investors

    C. allows the broker-dealer to borrow money from a bank for margin accounts

    D. is required for both cash and margin accounts

    Answer: B. allows the broker-dealer to loan a customer’s margined securities to other investors

    A loan consent form is required only for margin accounts, not cash accounts. Although technically it isn’t required, almost all firms require that customers sign it prior to opening a margin account. The loan consent form allows the broker-dealer to loan a margin customer’s securities to other investors or broker-dealers, typically for the short sale of securities.

  2. An investor opens a margin account by selling short $5,000 worth of securities. What is the margin call?

    A. $1,500

    B. $2,000

    C. $2,500

    D. $5,000

    Answer: C. $2,500

    In an initial transaction for a short margin account, the investor has to deposit Regulation T (Reg T; 50 percent) of the amount of securities shorted, or $2,000, whichever is more. Because this investor is shorting $5,000 worth of securities, he has to deposit ($5,000)(50%) = $2,500.

  3. All of the following would reduce the debit balance in a long margin account EXCEPT

    A. cash deposits

    B. cash dividends

    C. stock dividends

    D. liquidation of stock held in the account

    Answer: C. stock dividends

    Choices (A), (B), and (D) bring money into the margin account and thus would help pay down the debit balance (DR; the amount owed to the broker-dealer). However, receiving a stock dividend doesn’t affect the overall value of investment and doesn’t bring money into the account to help pay down the debit balance.