Margin Mechanics: Buying Power, Debit Balances, Equity, and the Special Memorandum Account (SMA)
Margin mechanics questions reward clean bookkeeping. The core identities are: Equity = Long Market Value (LMV) - Debit Balance, and Buying Power = Equity / initial margin requirement (or, for a fully margined long account, roughly 2x equity). The debit balance is what the customer owes the broker: the amount financed plus accrued interest. When a customer deposits cash, it reduces the debit; when securities are purchased on margin, the debit increases by the financed portion.
The Special Memorandum Account (SMA) is the account's excess-equity memory. It is created when equity exceeds the Reg T initial requirement (for example, after a security appreciates or a cash dividend is received). SMA represents buying power that can be used without a new deposit, but it is not cash and cannot be withdrawn as cash unless it is first used to support a purchase (or the account has free credit). A frequent trap: treating SMA as withdrawable cash, or forgetting that SMA does not decrease when the market value of securities declines. SMA is a one-way ratchet upward in that respect: market declines do not reduce SMA, though using it to buy securities does.
Worked example: Customer buys $10,000 of stock at 50% initial margin, depositing $5,000; debit = $5,000, equity = $5,000. If the stock rises to $14,000, equity = $9,000, and SMA = equity - 50% of LMV = $9,000 - $7,000 = $2,000. That $2,000 is buying power, not cash.