What Is a Debit Balance?

The debit balance in a margin account is the amount of money a brokerage customer owes their broker for funds they've borrowed from the broker to purchase securities on margin.

How a Debit Balance Works

When buying on margin, investors borrow funds from a broker and then combine those funds with their own in order to purchase a greater number of shares and, if all goes well, earn a greater profit. This is known as leveraging their position.

The two primary types of brokerage accounts used to buy and sell financial assets are a cash account and a margin account. In a cash account, the investor can only spend the cash balance they have on deposit and no more. For example, if a person has $2,000 in their cash account, they can only buy securities worth a total value of $2,000 unless they add more money to the account.

A margin account allows the investor 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. In order to borrow money, the investor pledges cash or securities already in their margin account as collateral.

For example, an investor with a $2,000 cash balance might want to purchase shares worth $3,000. Their broker could lend them the other $1,000 through a margin account, with the investor putting up $2,000 in cash. In this case, the debit balance would be $1,000.

What Is an Adjusted Debit Balance?

An adjusted debit balance is the amount of money in a margin account that is owed to the brokerage firm, minus profits on short sales and balances in a special memorandum account (SMA).

The adjusted debit balance tells the investor how much they would owe the broker in the event of a margin call, which requires the repayment of borrowed funds to the brokerage firm if the balance in the account drops below a certain level. That can happen when a security purchased on margin falls in value.

Financial industry regulations permit an investor to borrow up to 50% of the purchase price of securities on margin, which is stipulated in the Federal Reserve Board's Regulation T. That is referred to as the initial margin.

In addition, investors must meet a maintenance margin requirement set by their brokerage firm. That's the amount of equity they need to have in their margin account at all times, and it is calculated by subtracting the money they owe their broker from value of the cash and securities in their account. Industry rules require the maintenance margin to be at least 25% of the market value of the margin securities, but some brokerage firms set a higher minimum.

The Bottom Line

A debit balance is the amount of money a brokerage customer owes their broker for securities purchases they have made on margin. If the debit balance gets too high relative to the equity in the account, the investor may be subject to a margin call. For that reason, investors with margin accounts should regularly check how much equity they have in their accounts and be prepared to come up with additional cash if they need to.