Understanding Free Credit Balances: Definitions, Rules, Instances
What is Free Credit Balance?
Free credit balance refers to the available cash held in a customer’s margin account at a broker-dealer that can be withdrawn at any time. It represents the uninvested money in the account after considering margin requirements, short sale proceeds, received dividends, and unsettled purchase transactions. Some brokers may pay interest on this free credit balance.
### Key Takeaways
– The free credit balance is the capital available for withdrawal after taking into account all transactions and margin requirements.
– Interest on free credit balances is optional and not all brokers offer it.
– Free credit balances are regulated by the SEC and FINRA in the US.
Understanding the Free Credit Balance
In a cash account, the credit balance is the remaining amount after purchases, with no withdrawal restrictions. However, in a margin account, the credit balance includes cash, short sale proceeds, margin requirements, excess margin, and buying power. The free credit balance is a crucial calculation to determine the total withdrawable amount for the account holder.
While not mandatory, some brokers pay interest on funds in free credit balance accounts. Some brokers allow customers to transfer funds into short-term accounts, subject to customer authorization.
Regulations Covering Free Credit Balances
Free credit balances are subject to strict regulations to safeguard customer funds from misuse by brokers and potential financial risks. The SEC and FINRA require brokers to report and notify customers about their account balances regularly.
Examples of Free Credit Balances in Trading Accounts
For instance, an investor with a $10,000 deposit in a margin account has a $10,000 free credit balance before any trades.
If the investor then buys $5,000 worth of stock, their free credit balance becomes $5,000, excluding fees.
Cash dividends received will increase the free credit balance.
Margin requirements impact the free credit balance, with interest paid on margin positions affecting the total.
Interest can be paid on the free credit balance and may offset interest charges on margin positions.
Similar to non-margin accounts, dividends received contribute to the free credit balance.
