Debit Balance

What Is a Debit Balance?

The debit balance in a margin account is the total amount of money owed by the customer to a broker or other lender for funds borrowed to purchase securities. The debit balance is the amount of cash the customer must have in the account following the execution of a security purchase order with the goal that the transaction can be settled appropriately.

Understanding a Debit Balance

When buying on margin, investors borrow funds from a broker and afterward join those funds with their own to purchase a greater number of shares and, ideally, earn a greater profit. This is known as leveraging their position.

The two primary types of investment accounts used to buy and sell financial assets are a cash account and a margin account. In a cash account, an investor can spend the cash balance on deposit and no more. For instance, on the off chance that the trader just has $1,000 in their cash account, they can buy securities worth a total value of $1,000.

A margin account permits an investor or trader to borrow money from the broker to purchase extra shares or, on account of a short sale, to borrow shares to sell in the market. An investor with a $1,000 cash balance might need to purchase shares worth $1,800. In this case, their broker can loan them the $800 through a margin account. In this speculative case, the debit balance would be $800 since that is the amount owed in the margin account to the broker for funds advanced to purchase securities.

The debit balance can be diverged from the credit balance. While a long margin position has a debit balance, a margin account with just short positions will show a credit balance. The credit balance is the sum of the proceeds from a short sale and the required margin amount.

Adjusted Debit Balance

A margin account could have both long and short margin positions. A 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 memorandum account (SMA).

In a margin account, the brokerage customer can borrow funds from the brokerage firm to purchase securities and pledge cash or securities currently in the margin account as collateral. The adjusted debit balance illuminates the investor how much would be owed to the broker in the event of a margin call, which requires repayment of the borrowed funds to the brokerage firm.

Industry regulations permit an investor to borrow up to half of the purchase price of securities on margin, which is stipulated in Regulation T.

Features

• The amount borrowed in the margin account is the debit balance.
• An adjusted debit balance is the debit balance minus the profits from short sales in the account.
• The debit balance in a margin account is the total owed by a customer to a broker for funds borrowed to purchase securities.
• A cash account just purposes the cash accessible to purchase securities, while a margin account utilizes borrowed money from the broker to purchase securities.
• There are two types of trading accounts: a cash account and a margin account.
• Borrowing on margin is otherwise called being leveraged.