Trading on margin involves borrowing cash from your broker to make additional trades. The special memorandum account gets filled if those margin-bought investments start to go up in value. That extra, unrealized value gets accounted for in the SMA as a line of credit.
Probably best to explain this one with an example:
You deposit $10,000 into a trading account. Then you borrow an additional $10,000 on margin. You use the $20,000 to buy 1,000 shares of Flappy Jacks Inc., a maker of premium pancake oil extract. The shares are trading at $20 when you buy them. Within a few weeks, they're up to $25. The value of your stake is up to $25,000...a total unrealized gain of $5,000 (unrealized because it only becomes a real gain if you sell the shares and lock in the profit). Of the $5,000 in paper profits, $2,500 stays in the main account. This amount represents the gain posted using the your original $10,000 cash deposit. The other $2,500, the amount of gain related to your $10,000 margin loan, exists in the SMA.
The SMA largely exists as an accounting tool. The money is treated differently because it was earned on the margin loan, not on the cash you deposited. Once you sell the stock, and square up the margin loan, you can pay back the $10,000 (plus any interest) and transfer that $2,500 SMA amount into actual cash.
Related or Semi-related Video
Finance: What Does it Mean to Churn an A...12 Views
Finance allah shmoop What does it mean to churn an
account All right Well back in colonial times before america
was the good old u s a You know what
That i po and seventeen seventy six colonists would churn
cream into butter back then churning involved moving a plunger
in a wood bucket over and over and over again
Really good for the traps and lattes there Not exciting
but well that's What happens when there's No better technology
today churning is something illegal that stock brokers dio and
remember normally brokers pay their own rent by getting paid
a commission off of each trade they do for customers
So churning in the financial sense here means that stockbrokers
are making tons of trades they really don't need to
be making in a client's account in order to generate
mohr commission for themselves they're churning the account to generate
dough for themselves Illegal very bad And sometimes it can
be difficult to detect or stop You know think about
little old ladies not really paying attention to our account
or ah cardiologists who really has no idea how wall
street works They have no idea of the brokers churning
Or not Well if you fall prey to a broker
who's involved in churning you'll end up overpaying them in
commissions And you might even have to pay extra taxes
because they realized gains from all those trades they didn't
need to make But if that brokered does get caught 00:01:26.979 --> [endTime] yeah he's toast
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