Nancy checks her margin account and notices she has an SMA balance in her account. A 10% stock dividend was declared this morning on one of the companies she had purchased on margin. She asks her RR how this will affect her SMA balance. How should the RR respond?

Dividend declare has no impact on the SMA. RR would respond the following way.

Explanation:

SMA is known as "Special Memorandum Account". It is simply a line of credit, neither cash nor equity. It is created with the market value of the securities increase in the value. The purpose of SMA is to maintain the buying power that is provided by unrealized gains towards the subsequent purchases. SMA is an appropriate way to maintain stable account value and minimize unnecessary accounts funding.

SMA increases with the increase in the value of the security, but does not decrease when the security falls in the value.

SMA is increased by the transactions such as cash deposits, interest income or dividend received or security sales. Dividend declared by the company creates a positive sentiments in the minds of investors. However, it will not create any impact on the SMA account, until it is actually received.

The RR should respond that her SMA balance will not include the dividend. When you have a margin account, any dividends declared have no effect on the SMA account until the margin loan is paid back. A margin account is essentially a loan from your brokerage firm. That loan must be paid off first before you collect any balances.