ENT Credit Union

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The Margin Account

What is a margin account? How do you get one? How do you use margin? How does borrowing work?

Learn all about margin accounts here, including the terminology and the requirements for trading on margin.

What is a Margin account?

A margin account is basically a loan account between you and Pershing LLC (Pershing), the firm that CFS contracts with to hold your securities and funds. When you use a margin account you first determine how many shares of a stock you want to buy, then you use your own money to put down at least 50 percent of the total purchase price of those shares, and Pershing loans you the remaining amount.

To help you understand margin accounts, here are explanations of some special terms.

Current market value

This is the total value of the shares you have purchased as of the last trading date. The value is updated at the close of the market each market day. This process is known in the securities industry as "mark to the market."

The "Initial Margin Requirement"

The amount you must deposit when purchasing marginable securities. The "Initial Margin Requirement" is set by the Federal Reserve Board using special enabling legislation called "Regulation T". The Federal Reserve can and does change the initial margin requirement as market conditions demand. Currently, the initial margin requirement is set at 50%. The Federal Reserve requires the initial deposit of at least $2,000.00 in equity to establish a margin account.

The "Debit Balance"

The amount loaned to you by Pershing is called your "debit balance." Your debit balance consists of the amount you owe Pershing plus interest on this loan amount.


This is the difference between the current market value of your stock and your debit balance. Your equity changes as the current market value of your stock rises and falls and as interest is added to your debit balance.

Let's say you buy 100 shares of General Dynamics Corp selling at $80 a share on margin.

The current market value of your purchase would be $8,000. Using today's 50% initial margin requirement, you would deposit $4,000 into your margin account. Then Pershing would loan you the remaining $4,000 which would be your debit balance. Your equity in the account would be $4,000 (or 50%).

$8,000 (Current Market Value)
$4,000 (Debit Balance)
$4,000 (Equity)

The Advantages and Disadvantages of a Margin Account


Using a margin account gives you leverage. Leverage means that you can purchase more marginable securities for less money.

Let's say, continuing with the example above, that General Dynamics Corp. goes up $20 per share giving you a total unrealized gain on the stock of $2,000. If you had originally paid in full for the stock with $8,000 of your own money, your percentage gain given this $20 per share increase would be 25% ($2,000 divided by $8,000). However, because you used margin and put up only 50 percent of the total purchase price, your percentage gain is ($2,000 divided by $4,000) or 50%.


Another benefit is the ability to take a margin loan and withdraw funds using a margin loan. For more information regarding withdrawing funds from your account see Getting Money Out of Your Account.

The disadvantage of margin account


Unfortunately, leverage also works in reverse. If instead of rising $20 per share, General Dynamics Corp. fell by $20 share, all of the calculations we just talked about would be turned around. Your percentage loss in the margin account would be 50% compared to only 25% in a cash account. In addition, there are circumstances where your account could be liquidated.

Your Debit Balance and Margin Interest Rates

Paying off a debit balance

Except for the addition of daily interest charges, your debit balance does not change from the amount loaned to you when you originally bought the stock. Specifically the rise or fall of your current market value will not affect your debit balance. However, it will affect your equity percentage.

To reduce or pay off your debit balance you have to bring funds into your account in either or both of two ways:

  • Deposit funds directly into your account
  • Sell securities in your account. The proceeds will first be used to pay off your debit balance and then you will receive whatever is left over.

Margin interest rates

Margin interest rates are definitely a fact of life in margin account investing. For as long as you maintain a debit balance, interest will be added daily to your debit balance.

The annual rate of interest charged for margin loans is a fixed percentage above or below Pershing's base rate which is set at Pershing's discretion. That base rate is set with reference to commercially recognized interest rates, such as the broker's call loan rate, as quoted by major money center commercial banks.

The amount of interest you are charged can vary based on the amount of money you have borrowed on margin. The margin interest rates are subject to change at Pershing's discretion without prior notice. For the most current margin rates, see Pricing Information.

Buying Power and Excess Equity

Buying Power

Buying power is the total amount of additional marginable stock you could buy with the excess equity in your account. With a 50% Reg T margin requirement, simple mathematics says that any given amount of excess equity can buy twice that amount in additional stock.

What is Excess Equity

Let's use the General Dynamics Corp. example again where the stock has just increased in price by $20 per share. Your margin account would look like this:

$10,000 (Current Market Value—100 shares x $100/share)
  $4,000 (Debit Balance—the original Pershing loan)
  $6,000 (Equity)

As you recall from our hypothetical example, when you originally purchased the stock, the equity in your margin account was $4,000, so you now have an unrealized, or paper profit, in your account of $2,000. You could realize that profit immediately by selling your General Dynamics shares, repaying your loan, and withdrawing the $2,000 in cash, minus interest charges of course.

But you may not want to close out your General Dynamics position. Perhaps you think the shares will go even higher. Meanwhile, though, you really would like to somehow take advantage of the paper profit you already have.

And there is a way to do that in a margin account. You can't take advantage of all the profit, but you can use part of it. That's the part known as Excess Equity and here's how it's calculated:

Take the current market value of your stock position and calculate how much of your own money you would have to put down if you were buying the stock at this current market value. In our case, and given the 50% initial margin requirement, that amount would be $5,000.

Now subtract that initial margin requirement from the equity now in your account. You will find that you have a surplus of $1,000 in equity and it is this surplus that is known as Excess Equity (EE).

Put another way, the formula for determining excess equity goes like this:

EE = Equity - (stock's current market value x Reg. T margin requirement)

There are two things you can do with your $1,000 in excess equity:

  • You can withdraw it as cash. This is essentially like getting a cash advance from a credit card and, like the credit card, the advance increases your indebtedness. Your debit balance will increase by $1,000.
  • You can use your excess equity to purchase more stock on margin. For example, given the 50% initial margin requirement, your $1,000 excess equity is the down payment on $2,000 worth of stock. In this case, your debit balance would increase by $2,000: consisting of the $1,000 excess equity "credit line" and the $1,000 loan.

There is one thing you cannot do with excess equity:

  • You cannot use it to pay off your debit. As mentioned earlier, the only way you can do that is by depositing funds into your account.

To repeat, with the current 50% Reg T margin requirement, your buying power in the example above is equal to twice the amount of your excess equity or in this case, $2,000.

Please note that you have to check the buying power in your account daily, because buying power fluctuates with the market price of the stock.

About Margin Calls

Meeting margin maintenance calls

In order to protect investors from overextending their margin purchases, the FINRA has established what is called a "minimum maintenance requirement." This is the minimum amount of equity expressed as a percentage of the current market value of your stock position which must be in your account.

In general, the minimum maintenance requirement is 35% for a well-diversified account, and 40% for short sales. In addition, we reserve the right at any time to adjust the minimum maintenance requirement on an individual account basis as well as on a stock by stock basis depending on a stock's trading volatility and other factors. We have higher maintenance requirements for concentrated and single position accounts.

To make the point especially clear, let's say that General Dynamics' stock drops by $30 per share. When you originally bought your 100 shares of General Dynamics at $80 per share, your account looked like this:

$8,000 (Current Market Value)
$4,000 (Debit Balance)
$4,000 (Equity)
Equity as percent of CMV 50 percent

But after the $30 price drop, your margin account looks like this:

$5,000 (Current Market Value)
$4,000 (Debit Balance)
$1,000 (Equity)
Equity as percent of CMV 20 percent

As you can see, after the price drop, the equity in your account has fallen below our 35% minimum maintenance requirement. Whenever that happens, we try to send you a courtesy message telling you that you have a "margin maintenance call" or more simply, "margin call". However, it is important that you monitor your own account closely because there can be times when CFS will have to liquidate without notifying you beforehand. CFS can liquidate at any time, especially if the value of the stock is declining rapidly. In addition, a stock will no longer be eligible for margin if it declines below $3 per share. That event could also trigger a maintenance call.

There are two ways to meet a margin call:

Sending in Funds: CFS prefers that you send in funds for the amount you owe. This is the best way for you to assure yourself that your account will not be sold out on the due date. Please use Federal Express or overnight mail to make sure that the money gets to us before the due date. Please note that if your equity continues to drop, in most cases, you will receive an additional margin call. In addition, if the drop is severe, the account may be sold out anyway.

The amount of money you must deposit in your account to bring it back to the minimum maintenance requirement level is calculated by multiplying the stock position's current market value by the minimum maintenance requirement percentage. Thus, in the General Dynamics example above, you would have $5,000 multiplied by .35 or $1,750. Then you subtract the equity that you have remaining in your account from the $1,750 and come up with $750. The $750 is the amount of money you must deposit into your account to restore it to the minimum maintenance requirement level.

CFS will look at how much equity is in your account on the day the call is due to determine if you have put equity into the account to adequately cover the call.

The way CFS actually brings your account back into balance is by adjusting your debit balance. And cash deposit in a margin account is always applied against the debit balance. In this case, your debit balance would be reduced by the $750 and the minimum maintenance requirement would be re-established.

$5,000 (Current Market Value)
$3,250 (Debit Balance)
$1,750 (Equity)
Equity as percent of CMV 35 percent

Liquidating Securities: If you cannot bring in the required funds, or do not want to, you may liquidate enough shares in your account to bring your equity up to minimum requirements. Please note that the amount of stock you must sell is greater than if you were to send in funds. If you do this, however, you are not guaranteed to avoid a sell out. If you liquidate out of the call, your equity continues to decrease, or you do not sell enough to meet the call, you may be issued another call, or you may be subject to a sell out by CFS.

If you choose to liquidate out of a call by liquidating marginable securities, you must be aware that you may only receive in cash a percentage of the proceeds equal to your current equity percent.

If the account equity is below 50%, you will usually need to sell at least 2 times the amount due to cover the call. If the account equity is less than 30%, you may need to sell around 3 times the amount due.

Remember that these are approximate numbers and that you should make sure that any transactions you make have fully covered the call by checking your account balances the next day.

If on the other hand, you choose to liquidate out of a call with fully paid for cash securities, you must sell enough securities to generate the cash required to meet the call. The full dollar amount of the proceeds will be credited to the call.

What Happens if You Fail to Meet a Maintenance Call?

A margin call requires you to restore your account to the minimum maintenance requirement level by a specific date, usually within three business days of receiving the call. If you do not meet the due date yourself, CFS may itself sell a portion of your long stock position to bring the equity percentage back. You are responsible for any losses taken in the stock during this process. CFS will usually restore the account to higher than the 35 percent requirement to prevent another immediate decline in the stock from putting the account back into a call situation.

Meeting Fed Calls

A Fed Call is a government-required call for you to increase the equity in your account immediately because you have bought securities for which you do not have sufficient buying power. A Fed Call is issued whenever you make a purchase of a marginable security in your margin account and you do not have the minimum initial requirements of 50% cash or loan available to make the purchase. After a Fed Call has been in effect for three days, a Regulation T Extension fee may be charged to your account.

CFS requires full funds or buying power to cover all trades in the account prior to placing an order. Should a trade without sufficient funds available to cover it go through, you will be subject to a call. In addition, if the market value of the security declines to the point where the current equity amount in your account drops below the Federal Reserve Board minimum, you will get a Fed Call.

There are two ways to meet a Fed Call:

Sending in Funds:
The best way to clear a Fed Call is to send in the funds immediately and certainly by the due date given you by the CFS margin department. This is the only way to take care of a Fed Call and not be penalized in any way.

Liquidating Securities:
If you cannot send in funds, or do not want to, you may elect to liquidate securities to generate enough cash or loan availability to meet the call. If you choose to liquidate instead of sending in the funds, you must sell 2 times the amount of the Fed Call. This is considered to be a liquidation, and is charged against your account.

If you do not meet the Fed Call, the margin department will liquidate enough of your shares to meet the call. This liquidation, whether you do it yourself or CFS does it for you, will be charged against your account. Four liquidations in a 12-month period will put a member on a 90-day restriction.

If a security in your account is bought and sold in quick succession without submitting to CFS payment for the purchase, it is called free-riding. Free riding violates Regulation T of the Federal Reserve Board, and may result in your account being restricted or closed.

Generally, no extensions will be granted on a Fed Call. But if there are extenuating circumstances, it is possible that an extension may be granted. This extension, however, is something that needs to be worked out between you, one of our member service representatives, and a margin supervisor.

90-Day Restrictions

When an account is placed on 90-day restriction, it means that you must have full funds/buying power for any trade you place. Accounts on 90-day restrictions are monitored more closely and any trades you place are subject to more review than other accounts. But it does not mean that you cannot use margin. Additional violations may mean that your account will be closed.

Margin Account Approval

Eligible CFS accounts, except for retirement accounts (such as IRAs) and custodial accounts, are opened as margin accounts if they meet certain criteria.

To be approved for margin trading, you must:

  • Request a margin account when you open your account
  • Have an account balance (cash or marginable securities) of at least $2,000
  • If trading from a trust account, the trust agreement must specifically state that margin trading is approved

To open a margin account if you are not yet approved:

Please contact the CFS Service Representative at your local credit union branch, if available, or e-mail CFS at service@cusonet.com and request a "Margin/Option Update Form". This form is also available in PDF format on your "Forms" link. Complete the form and mail to CFS for approval.

Using your margin account after it's approved:

Once your margin account application is approved, all of your subsequent orders for marginable securities will be filled from the margin account. To cover a transaction, CFS uses all available cash and money market funds, if any. Any remaining balance will be charged margin interest.

Remember that you don't have to put in any special orders to trade on margin. If you have a margin account and place an order that exceeds the amount of cash you have (and is within your margin buying power), the order will automatically go on margin. Here's an example of how this works. If you have $2,000 of cash in your account, and you purchase $3,000 of a marginable security, you have automatically taken out a margin loan for $1,000 from Pershing. Your debit balance is $1,000 plus margin interest.

Margin Requirements

Here is a list of some of the different types of securities you can trade on margin at CFS, along with other essential margin information. Please note that these numbers can change without prior notification.

The minimum equity requirement is $2,000 for margin accounts.

Stocks and Warrants:

Listed or Fed-approved OTC Equities:
the initial requirement is 50% of the net amount. Maintenance requirement is the greater of 30% of the market value or $3/share.

Other equities and warrants:
the initial requirement is 100% of the net amount. The maintenance requirement is 100% of the market value.

Equity (listed or unlisted) Short Sale:
initial requirement is 50% of the net proceeds and the maintenance requirement is the greater of 35% of the short market value or $5 per share.

Mutual Funds:

The initial requirement is 100% of the net amount; purchases must be made iin the cash account. Maintenance requirements are 100% of the net amount for the first 30 days after the settlement date, if transferred to a margin account, then the greater of 30% of the market value or $3 per share.

When Issued Securities:

The initial requirement is the greater of 25% of the net amount or $2,000, not to exceed 100% of the net amount. Maintenance requirement is the greater of 25% of the net amount or $2,000, not to exceed 100% of the market value.

For margin accounts, when issued securities are treated as if they were issued securities. Initial public offerings of when issued securities are not marginable.

For all other securities, please contact the CFS Customer Service Desk for updated information regarding margin requirements. Call 1-877-CUSONET (1-877-287-6638) or email service@cusonet.com.

Non-deposit investment products and services offered through CUSO Financial Services, L.P. (Member FINRA/SIPC) are:
• not NCUA/NCUSIF or otherwise federally insured • not guarantees or obligations of the credit union
• may involve investment risk, may lose value