A credit balance is the amount left in a cash account with a securities broker after a deal is executed on the client’s behalf. The credit balance includes the margin amount the client is required to maintain on hand, along with proceeds from sales, dividends, and other financial activities. Brokers are required to provide statements to their clients detailing their credit balances and providing information about how their accounts were used during a given accounting period.
A closely related concept is the free credit balance. The credit balance refers to the total amount of money in a cash account, but people cannot actually access all this money, unless they are planning on closing out their accounts, in which case any remaining fees and bills will be deducted and the remainder will be paid out. The free credit balance reflects the amount of money the customer actually has to work with, the funds available for use in investments and other activities.
It is also possible to have a debit balance, in which case a call from the broker will probably occur. People may end up owing their brokers if a deal does not go as planned and brokers can issue what is known as a margin call, asking the investor to either deposit more cash into the account or to turn over securities in order to meet the margin requirements. Margin requirements are used as a form of protection by brokers to ensure the availability of funds to back deals executed on behalf of a client.
The total of someone’s credit balance can fluctuate. Various policy requirements at the broker’s, such as margin requirements, can alter the amount of money that should theoretically be in the account at all times. When people earn money on their securities, these funds are deposited into the cash account, and when purchases are made, funds are deducted. While the broker controls the cash account, the funds officially belong to the client and the broker must use the funds responsibly.
Most investors do not wait for statements from their brokers to find out about their credit balances. People can call their brokers at any time for an update. These updates are used to determine how much free credit is available, and to prepare for requests to sell or transfer securities to meet margin requirements. Being aware of the amount of funds available for investment activities is important for people meeting with their brokers or agents to discuss possible purchases.