Series 7 Exam Question 239: Answer and Explanation

Question: 239

All of the following increase SMA in a long account EXCEPT

I. selling securities from the account

II. the purchase of additional securities in the account

III. receipt of a cash dividend

IV. a decrease in the market value of securities held in the account

• A. I and III
• B. II and IV
• C. I, III, and IV
• D. II, III, and IV

Correct Answer: B

Explanation:

B. This question is a tough one because of the way that it's worded. I suggest that you write "increases SMA," "decreases SMA," or "doesn't change SMA" next to each possible answer before answering the question.

I. Selling securities in a margin account increases the SMA by half the amount of the sale and decreases the debit balance by half the amount of the sale (increases SMA).

II. The purchase of additional securities in a long margin account has no effect on the SMA unless using the buying power, which you can't assume (doesn't change SMA).

III. Money being deposited into the margin account by way of cash dividend or cash payment increases the SMA by the amount of the deposit (increases SMA).

IV. A decrease in the market value of the securities doesn't change the SMA. Remember, you don't lose SMA until you use it (doesn't change SMA).

Now that you have this part down, look at the question again to see what it's asking. Because this is an EXCEPT question, you're looking for the statements that do not increase the SMA, which are Statements II and IV.