Trading on margin involves borrowing cash from your broker to make additional trades. The special memorandum account gets filled if those margin-bought investments start to go up in value. That extra, unrealized value gets accounted for in the SMA as a line of credit.
Probably best to explain this one with an example:
You deposit $10,000 into a trading account. Then you borrow an additional $10,000 on margin. You use the $20,000 to buy 1,000 shares of Flappy Jacks Inc., a maker of premium pancake oil extract. The shares are trading at $20 when you buy them. Within a few weeks, they're up to $25. The value of your stake is up to $25,000...a total unrealized gain of $5,000 (unrealized because it only becomes a real gain if you sell the shares and lock in the profit). Of the $5,000 in paper profits, $2,500 stays in the main account. This amount represents the gain posted using the your original $10,000 cash deposit. The other $2,500, the amount of gain related to your $10,000 margin loan, exists in the SMA.
The SMA largely exists as an accounting tool. The money is treated differently because it was earned on the margin loan, not on the cash you deposited. Once you sell the stock, and square up the margin loan, you can pay back the $10,000 (plus any interest) and transfer that $2,500 SMA amount into actual cash.
Related or Semi-related Video
Finance: What is an offshore account, an...11 Views
Finance Allah Shmoop What is an offshore account And how
do you open one Or rather why would you even
want Teo Here's onshore That's us the US of A
We have laws and rules which well most people follow
anyway and we have taxes to pay for our military
defense and our football stadiums and our congressional mistress Tag
along travel We're not perfect but show us a better
place and we'll salute them while we're standing So when
you hear someone musing about opening an offshore account odds
are good that they're trying to find a way to
hide taxes that they probably legally owe to the U
S Government No this is not always the case Someone
might be running a small business importing coffee from Guatemala
and they need a bank account offshore like in Guatemala
Pay for the beans because you know the Guatemalan being
selling company does not accept us dollars like really are
Currency isn't good enough for them Yeah alright skepticism alert
But it does happen And people do open offshore accounts
often under very snazzy sounding marketing slogan names by large
global banks that take extremely high privileges like commissions for
doing so Offshore accounts aren't illegal and the clever marketing
that runs behind them include things like uh diversify your
political risk because the U S Government might go under
and you should really have an account in the Caymans
in the Bahamas and Bailey's because well those countries are
solid Their banking systems are better protected than those in
the US Oh and there's the lawsuit protections Logan That's
a good one Like you might do something very bad
in the US and gets sued for it and lose
And then the way to make it harder for your
sewers to collect the money you owe them is to
squirrel away your money in a foreign bank That makes
sense And yes it's OK to mumble a muse what
kind of customer these offshore accounts are attracting And then
there's the Diversify your currency slogan That's a good one
Like you need an offshore account to do so Or
like normal people should even begin toe worry about diversity
defying their currency exposure A meaning like the presumption is
that the average Joe will somehow do better than the
thirty million dollars a year Wall Street talent who has
actually trained on howto invest in currencies around the world
by diversifying well buying New Zealand and Aussie dollars to
do better than American dollars in some meaningful way You're
really kind of bet the ranch on that Uh yeah
Not bloody likely So don't forget the access to medical
care argument That's always a good one The hi fi
banks will plant all kinds of worry warts on your
brain that somehow you can't get the medical care you
need in the US And yes it's a slog here
but that somehow having an off shore account you know
I don't know that Philippines will give you better medical
care access Really Yeah They market that in people who
can read actually buy in Well the implication here is
that you broadly get peace of mind or the ability
to transact globally by having one of these very expensive
accounts housed in the Isle of Man or Jersey or
some other foreign shadow country Yeah you know the saying
if it quacks like a duck and walks like a
duck Yeah probably a goose Offshore accounts If you do
get one you'll want your club card so you can 00:03:12.78 --> [endTime] always get into here
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