General Securities Sales Supervisor (Series10) Practice Exam

What does the SMA balance represent in a margin account?

1. A Cash available for immediate withdrawal

2. B The current stock price multiplied by the shares held

3. C The buying power available for purchases in the account

4. D The total equity held by the investor

The correct answer is: C The buying power available for purchases in the account

The SMA, or Special Memorandum Account, balance in a margin account represents the buying power available for purchases. This indicates how much the investor can use to buy additional securities without needing to deposit more cash or securities. The SMA serves as a cushion for the investor, reflecting any excess equity that can be utilized for purchasing additional securities while still maintaining the required maintenance margin. It acts as a credit for buying power and can influence an investor's ability to leverage their investments. In a margin account, the SMA can increase based on various factors, such as the appreciation of securities held, additional deposits made, or the reduction of margin debt. Thus, a higher SMA balance allows for greater purchasing capability within the account, providing the investor with flexibility for trading opportunities. Understanding this balance is critical for managing margin accounts effectively, as it directly impacts the ability to make new investment decisions without needing to liquidate existing positions or inject more funds into the account.