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Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opening a new margin account executes a first-time transaction buying 100 shares of XYZ stock at $30 per share. What is the minimum initial margin deposit required from the customer under Federal Reserve Regulation T and FINRA rules?

  1. A
    $1,500
  2. $2,000Answer
  3. C
    $750
  4. D
    $3,000

Answer

The minimum equity deposit required from the investor is $2,000.
For an initial purchase in a new margin account, Regulation T mandates a 50% deposit (1,500ona1,500 on a 3,000 transaction). However, FINRA rules specify that a customer must deposit a minimum of 2,000inequity(or1002,000 in equity (or 100% of the purchase price if the trade value is less than 2,000). Because 2,000isgreaterthan2,000 is greater than 1,500, the investor is required to deposit $2,000.

Step-by-Step Solution

1
Calculate the total market value of the purchase.
3,000(100shares×3,000 (100 shares × 30/share)
Margin requirements are calculated from aggregate trade value.
2
Determine the Regulation T initial requirement.
1,500(501,500 (50% of 3,000)
Federal Reserve Regulation T requires a 50% initial margin deposit for stock purchases.
3
Apply FINRA Rule 4210 minimum initial equity requirement.
$2,000
FINRA mandates a minimum initial equity deposit of 2,000or1002,000 or 100% of the purchase price, whichever is less. Since 2,000 is greater than 1,500,theinvestormustdeposit1,500, the investor must deposit 2,000.

Key Concept

FINRA $2,000 Minimum Initial Equity Rule vs. Regulation T 50%
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Topics

Margin Accounts and Borrowing Requirements