Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opens a margin account and executes an initial transaction by purchasing $400$ shares of a marginable equity security at $\$7$ per share. Under Federal Reserve Regulation T and FINRA rules, what is the minimum dollar amount of cash the investor must deposit for this transaction?

Answer: 2000 $

Answer

The minimum cash deposit required is $2,000.

For an initial margin transaction, Federal Reserve Regulation T requires a 50% deposit (

1,400 on a

2,800 trade). However, FINRA Rule 4210 requires a minimum initial equity deposit of

2,000. Because the calculated Regulation T margin of

1,400 is less than

2,000, the investor must deposit the FINRA required minimum of

2,000.

Step-by-Step Solution

1

Calculate total purchase value

$2,800

Multiply the number of shares purchased by the price per share (

400 \times \$7 = \$2,800

).

2

Calculate Regulation T 50% requirement

$1,400

Federal Reserve Regulation T mandates an initial deposit of 50% of total trade value (

0.50 \times \$2,800 = \$1,400

).

3

Apply FINRA minimum initial equity threshold

$2,000

FINRA Rule 4210 sets a minimum equity requirement of

\$2,000

(or 100% of purchase value if total purchase is less than

\$2,000

). Because

\$1,400

falls below

\$2,000

, the investor must deposit

\$2,000

.

Key Concept

FINRA Minimum Initial Equity Deposit Requirement ($2,000 Rule)

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Topics

Margin Accounts and Borrowing Requirements