Series 7 margin formulas

Reg T and the opening minimums

Regulation T, set by the Federal Reserve, governs the initial extension of credit for securities purchases. FINRA Rule 4210 then layers opening and maintenance requirements on top. These numbers must be automatic before any formula below is useful.

• Reg T initial requirement

  50% of the purchase price on a long position — and 50% of the short sale proceeds on a short. The customer deposits that amount; the broker-dealer extends credit (long) or holds the short proceeds (short).

• Minimum equity to open a margin account

  $2,000 under FINRA Rule 4210. For a small long purchase where 50% is less than $2,000, the customer must deposit the full purchase price instead. Short sellers must meet the $2,000 floor regardless.

• Pattern day trader minimum

  A pattern day trader must maintain minimum equity of $25,000 in the margin account at all times. An account that falls below is restricted from new day trades until the deficiency is cured.

• Reg T applies to the trade, not the account balance

  Reg T is an initial requirement tied to each purchase or short sale. Subsequent price moves don't trigger a new Reg T call — they feed into maintenance and SMA math instead.

Long margin account equity

Every long-account question reduces to one formula and its consequences.

• Equity (long)

  Long Market Value − Debit Balance = Equity. LMV is the current value of positions held long; the debit balance is what the customer owes the broker-dealer.

• Reg T excess (long)

  Equity − (0.50 × LMV). A positive number means the account has excess over the initial requirement; a negative number means the account is restricted.

• Worked example

  Customer buys $20,000 of stock on margin. Reg T call is $10,000. After the trade: LMV $20,000, DR $10,000, Equity $10,000 — exactly 50% of LMV. If the stock rises to $30,000: LMV $30,000, DR $10,000, Equity $20,000. Reg T excess is $20,000 − (0.50 × $30,000) = $5,000, which feeds SMA.

Short margin account equity

The short account looks backwards because the market value is a liability, not an asset.

• Equity (short)

  Credit Balance − Short Market Value = Equity. The credit balance contains the short sale proceeds plus the customer's Reg T deposit; SMV is the current cost to cover the short.

• Reg T excess (short)

  Equity − (0.50 × SMV). As with a long account, a positive number feeds SMA; a negative number restricts the account.

• Worked example

  Customer sells short $20,000 of stock. Reg T call is $10,000. Credit balance is $20,000 in proceeds + $10,000 in deposit = $30,000. SMV $20,000, Equity $10,000 — 50% of SMV. If the stock falls to $15,000: CR $30,000, SMV $15,000, Equity $15,000. Reg T excess is $15,000 − (0.50 × $15,000) = $7,500.

Maintenance requirements and maintenance calls

Maintenance is the ongoing minimum equity required once a position is open. FINRA sets the floor; houses may set higher requirements.

• FINRA minimum maintenance (long)

  25% of LMV. Equity below 25% of LMV triggers a maintenance call equal to the shortfall: (0.25 × LMV) − Equity.

• FINRA minimum maintenance (short)

  30% of SMV for stocks priced at $5 or more. Equity below 30% of SMV triggers a call equal to (0.30 × SMV) − Equity.

• Low-priced short stocks

  For short positions in stocks below $5 per share, the maintenance requirement is the greater of $2.50 per share or 100% of SMV. The rule exists because low-priced shorts carry outsized percentage risk.

• House requirements

  Broker-dealers routinely set house maintenance above the FINRA floor — 30% or more on long accounts, higher on volatile names. The exam defaults to the FINRA minimum unless the question specifies a house rate.

SMA, buying power, and restricted accounts

SMA is where every long-term effect of Reg T, deposits, and equity growth lives. Buying power is just SMA translated into purchase power under the 50% initial requirement.

• What SMA is

  The Special Memorandum Account is a running line of credit inside the margin account. It accumulates when the customer deposits cash or securities, when a long position is sold, when Reg T excess appears, and when dividends or interest are credited.

• The one-way rule

  SMA does not decrease when market values fall. It only decreases when the customer actually uses it — to withdraw cash, to buy more securities, or to sell short. A rising market can raise SMA; a falling market cannot lower it.

• Buying power

  Buying power = SMA × 2 under Reg T 50%. Each dollar of SMA supports $2 of new marginable purchases because the customer only has to put up 50% of the purchase price.

• Restricted accounts

  An account is restricted when equity is below the Reg T initial requirement but still above maintenance. The position doesn't have to be closed — but withdrawals and new buying power are constrained until equity recovers.

• The 50% retention rule

  When securities are sold in a restricted account, 50% of the sale proceeds must be applied against the debit balance; the other 50% is released to SMA. The customer cannot sweep 100% of the proceeds out of the account while restricted.

How to work a margin question under exam time

The fastest candidates don't solve margin questions — they apply a four-step template to every prompt.

1. Identify the account. Long-only, short-only, or combined? A combined account nets long equity and short equity into a single figure — the formulas still apply, but to the pieces separately before you combine.
2. Compute equity from the balance sheet. LMV − DR for longs; CR − SMV for shorts. Do this before anything else. Every downstream number — Reg T excess, maintenance call, SMA — reads off equity.
3. Apply the requirement or call formula. If Reg T excess is asked: Equity − (0.50 × MV). If maintenance: compare Equity to 0.25 × LMV (long) or 0.30 × SMV (short). If SMA: remember SMA only moves from use or from new Reg T excess, not from price moves.
4. Sanity-check the direction. Did the stock go up? Long equity should rise, short equity should fall, and the account could be moving toward or away from a call in a direction the prompt describes. A ten-second check catches nearly every sign error.

The traps the exam loves

Margin distractors cluster around a small number of predictable mistakes. Name them so they don't cost you points.

• Confusing Reg T with maintenance

  Reg T is a 50% initial requirement tied to a trade; maintenance is a 25% (long) or 30% (short) ongoing requirement tied to the account. Different events trigger each — the exam leans on candidates who blur the two.

• Thinking SMA drops when stocks fall

  It does not. SMA is one-way from market moves: up when Reg T excess appears, flat when prices drop. The only way SMA decreases is when the customer uses it.

• Applying 25% maintenance to a short account

  Shorts require 30% maintenance at the FINRA minimum — and more when the stock is under $5. Using the long 25% number on a short position is a common sign-it-wrong mistake.

• Ignoring the $2.50 / 100% rule on low-priced shorts

  A short sale at $3 per share requires greater of $2.50/share or 100% of SMV — not 30%. Low-priced short questions are often the exam's way of testing whether you know there's a different rule.

• Forgetting the 50% retention rule

  In a restricted account, selling stock does not fully free up cash — half goes to the debit, half to SMA. Questions that ask for available cash in a restricted account rely on this.

How PassSeries7 drills margin math

PassSeries7 ships the margin chapter inside the 436-page handbook across 20 chapters, with worked long- and short-account balance sheets, Reg T and maintenance examples, SMA step-throughs, and buying-power walkthroughs. Section-tagged flashcards from the 385-card deck push the equity, Reg T excess, maintenance, and SMA formulas into spaced-recall rotation so the templates stay automatic. The 1,000-question mapped practice bank includes margin-only sets with worked explanations for every distractor — so you learn which trap each wrong answer is testing, not just which letter was right. The 125-question full-length exam simulation threads margin items throughout a 3h45m block, so fatigue on margin math surfaces before exam day.