Debit Balance Definition – Credit & Debt
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 advanced to purchase securities.
Therefore, the debit balance is the amount of cash the customer must have in the account following the execution of a security purchase order to that the transaction can be settled properly.
Understanding Debit Balance
When buying on margin, investors borrow funds from a brokerage and then combine those funds with their own in order to purchase a greater number of shares and, hopefully, earn a greater profit.
The debit amount, which is recorded by the brokerage in the investor's account, represents the cost of the transaction to the investor.
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 only spend the cash balance on deposit and no more.
A margin account allows an investor or trader to borrow money from the broker to purchase additional shares or, in the case of a short sale, to borrow shares to sell in the market.
An investor with a $1,000 cash balance may want to purchase shares worth $1,800. In this case, his broker can lend the investor the $800 through a margin account.
In this hypothetical 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 contrasted with the credit balance. While a long margin position has a debit balance, a margin account with only 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.
- The debit balance in a margin account is the total owed by the customer to a broker or other lender for funds advanced to purchase securities.
- A margin account allows an investor to borrow money from the broker to purchase additional shares of a security.
- In contrast, the credit balance is the sum of the proceeds from a short sale and the required margin amount.
Adjusted Debit Balance
A margin account might have both long and short margin positions. 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 miscellaneous account (SMA).
In a margin account, the brokerage customer can borrow funds from the brokerage firm to purchase securities, pledging cash or securities already in the margin account as collateral. The adjusted debit balance informs the investor how much would be owed 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 50% of the purchase price of securities on margin.