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What Is an Adjusted Debit Balance?
An adjusted debit balance is the amount in a margin account that is owed to the brokerage firm, minus profits on short sales and balances in a special miscellaneous account (SMA). Debit balances can be contrasted with credit balances, which are funds owed to a customer's margin account by their broker.
Key Takeaways
- An adjusted debit balance is the amount in a margin account that is owed to the brokerage firm, minus profits on short sales and balances in a special miscellaneous account (SMA).
- Under Regulation T, one can borrow up to 50% of the purchase price of securities on margin.
- Debit balances can be contrasted with credit balances, which are funds owed to a customer's margin account by their broker.
How Adjusted Debit Balances Work
A debit balance, in general, is what a customer owes their broker in a margin account—an account that lets investors borrow funds to purchase securities, provided they have cash or securities in it to pledge as collateral and pay the lender a periodic interest rate.
The use of trading margin (leverage) in an investment account for the purpose of buying securities amplifies the gains or losses associated with those trades. To help curtail significant losses experienced by brokerage firms and investors due to unregulated margin trading, Regulation T (REG T) guidelines and the 50% rule was established, stipulating that an investor can borrow up to 50% of the purchase price of a security on margin.
Reg T limits the amount of credit an investor can get from their broker to buy securities on margin.
The adjusted debit balance informs investors how much they owe in the event of a margin call—a demand for additional cash or securities to bring a margin account up to the minimum maintenance margin. This balance is made available to clients regularly, ensuring that they can always keep tabs on any borrowed funds that they are required to pay back to the brokerage firm.
The Financial Industry Regulatory Authority (FINRA) has set the minimum maintenance margin at 25% of the total value of the securities in a margin account. However, broker firms often require that their customers hold more equity.
Special Considerations
Investors should be aware of the implications of trading on margin and the importance of regularly checking the debit balance of a margin account.
Brokers have the power to demand that customers increase the amount of capital they have in the account at any time. They are also permitted to sell the securities in them, sometimes without even consulting with the investor, to meet whatever maintenance margin has been specified and to sue customers who carry a negative balance and fail to fulfill a margin call.