Special Memorandum Account (SMA)
What Is a Special Memorandum Account (SMA)?
A special memorandum account (SMA) is a dedicated investment account where excess margin created from a client's margin account is kept, in this manner expanding the buying power for the client. The SMA basically addresses a credit extension and may likewise be known as a "special miscellaneous account."
Special memorandum accounts ought not be mistaken for separately managed accounts, likewise abbreviated by SMA.
Understanding a Special Memorandum Account (SMA)
SMA generally likens to the buying power balance in a margin account. Buying power, likewise alluded to as excess equity, is the money an investor has accessible to buy securities and equals the total cash held in the brokerage account plus all suitable margin.
The purpose of a SMA is to give extra buying power in a client's margin account. SMA exists when the margin equity in an account surpasses the Federal Reg T requirement of half. A Fed call will be issued against the account on the off chance that the Reg T initial requirement isn't met.
Brokerage firms work out the SMA balances of margin accounts toward the finish of each trading day to ensure they are greater than or equivalent to zero. SMA is calculated just as the previous day's SMA +/ - the change in current day cash, and +/ - the current day exchanges' initial margin requirements.
A SMA will lock in any gains realized in a client's margin account. In any case, the SMA balance varies.
Special Considerations
Consider the situation where stock inside a client's margin account understands a capital gain and makes excess margin. On the off chance that this excess amount is held in the account, and the stock position creates a capital loss sometime in the not too distant future, the client could then lose their gain totally.
The SMA balance expansions in value with cash deposits into the brokerage account. The SMA likewise holds interest and dividend payments from long positions and proceeds from closing out a securities position.
Clients can involve funds in their SMA to purchase extra securities for their margin account. The SMA balance diminishes with cash withdrawals from the brokerage account and when buy orders for securities are executed.
Features
- Brokerage firms work out the SMA balances of margin accounts toward the finish of each trading day.
- A special memorandum account (SMA) is a dedicated investment account where excess margin created from a client's margin account is held.
- A SMA compares to the buying power balance or excess equity in a margin account, which is money an investor needs to buy securities.
