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Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opens a new margin account with no existing positions or cash balance and purchases 100100 shares of ABC common stock at $34\$34 per share. What is the minimum dollar amount of equity the investor must deposit to meet Federal Reserve Regulation T and FINRA initial margin requirements?

Answer: 2000 $

Answer

The investor must deposit a minimum of $2,000\$2,000 in equity.
Under Federal Reserve Board Regulation T, an investor buying marginable securities must deposit 50%50\% of the purchase price, which equals $1,700\$1,700 (50%×$3,40050\% \times \$3,400). However, FINRA Rule 4210 stipulates that the minimum initial equity deposit in a new margin account must be at least $2,000\$2,000 (or 100%100\% of the purchase price if the total cost is under $2,000\$2,000). Since the total purchase value is $3,400\$3,400 (which is greater than $2,000\$2,000), the investor must deposit the higher amount of $2,000\$2,000 to fulfill all regulatory requirements.

Step-by-Step Solution

1
Calculate the total purchase cost of the transaction.
100 shares×$34/share=$3,400100 \text{ shares} \times \$34/\text{share} = \$3,400 total market value.
Margin calculations begin by establishing the total value of the securities purchased.
2
Calculate the Federal Reserve Regulation T initial margin requirement.
50%×$3,400=$1,70050\% \times \$3,400 = \$1,700.
Regulation T mandates a base initial margin deposit of 50%50\% of the purchase value.
3
Evaluate the FINRA minimum initial equity requirement for long margin purchases.
FINRA Rule 4210 requires a minimum initial equity deposit of $2,000\$2,000 for transactions exceeding $2,000\$2,000 in total value.
FINRA rules set an absolute dollar floor of $2,000\$2,000 for initial equity deposits in new margin accounts.
4
Determine the governing deposit amount.
The required initial deposit is $2,000\$2,000.
Because the calculated Regulation T requirement ($1,700\$1,700) is less than FINRA's $2,000\$2,000 minimum equity requirement, the investor must satisfy the larger FINRA requirement.

Key Concept

FINRA Minimum Initial Margin Requirement ($2,000 Rule)
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Topics

Margin Accounts and Borrowing Requirements