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The debit balance is the amount owed by an investor to a broker. Often, the balance is associated with the current amount the investor owes that is posted to a margin account. The debt is created due to the purchase of stocks, bonds, and other securities on a margin basis. As long as a debit balance exists in the margin account, the investor is charged interest on the outstanding balance.
When an investor chooses to purchase securities on a margin, a broker establishes what is known as a margin account in the name of the investor. Essentially, a margin account is a line of credit that is extended to the investor via the broker. This credit line can be used to purchase stocks and other securities without having to use the financial assets of the investor to make the purchase. When the securities are purchased on a margin, the amount of the purchases is debited to the margin account, creating a debit balance.
Repayment of the debit balance depends on the terms and conditions set by the brokerage. While it is necessary for the brokerage to comply with any governmental regulations set in place, there is often still some room for the brokerage to define terms above and beyond those regulations. The investor with a high credit rating may receive a substantial line of credit and have liberal repayment terms connected with the debit balance. Investors with fewer assets may be granted a smaller margin and have more restrictive terms of repayment until the brokerage determines the investor is a good credit risk.
In all cases, the debit balance is subject to finance and interest charges. However, the interest is usually at least competitive with the rates that the investor could obtain by borrowing the money directly from a bank or other financial institution. In addition, the ability to buy on margin can be established in advance and does not have to be used unless the investor chooses to do so. Interest does not begin to accrue until an actual purchase on margin is made.
Many investors are able to achieve a substantial return on a good investment purchased on a margin and repay both the debit balance and the applied interest in a short period of time. However, it is important to note that the debit balance is a debt that is owed by the investor regardless of how the acquired security performs.
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