Debit Balance
Candlefocus EditorDebit balance refers to the total amount of money a customer has borrowed from a broker to purchase securities in a margin account. A margin account is a type of investment trading account that allows a customer to borrow money from a broker to purchase stocks and other investments. Leverage through margin accounts allows a customer to invest greater sums of money than they have available in cash, increasing the potential return on their investment. The margin account is considered a loan and must be repaid.
When a customer buys securities on margin, they have to have agreement with the broker regarding the maximum amount that can be borrowed. The amount borrowed, or the debit balance, is the total amount of money borrowed, minus any profits earned from short sales in the account.
For example, a customer’s debit balance may be $5,000 if they have borrowed this amount from a broker. The customer then may make a short sale in their margin account and make a profit of $1,000. The customer’s adjusted debit balance would then be $4,000, excluding the profit made from the short sale.
The interest paid on the debit balance is dependent on the customer’s current equity out of the securities purchased with the borrowed funds. If the equity drops, then the debit balance becomes higher and higher, as the customer needs to pay more in interest. To avoid this, customers should always perform a risk management assessment of their investments.
Overall, being aware of debit balance is important for investors, in order to be aware of how much money is being borrowed and the amount of risk that is associated with borrowing such funds for the purchase of securities. It is also important for customers to be mindful of the risks associated with margin accounts, as margins can easily be wiped out if their investments don’t produce enough returns.