SMA Account or Special Memorandum Account: Meaning & Purpose

A SMA account is a line of credit that your broker maintains reflecting excess equity present in a margin account. As an inverter or a trader, you can use it to purchase future margins or make withdrawals without triggering any margin call.

One of the key purposes of it is to increase your buying power of shares or margin from the stock market. In India, as of FY26, there are 13.6 crore unique or registered investors or traders, showing an increasing interest towards investment or trade-related practices.

If you are one of them, learn about SMA here and use it to boost your trade capacity.

What Is a Special Memorandum Account (SMA)?

An SMA account is a separate account that your broker owns, and its functionality is similar to a credit account. Traders who typically use a Margin Trading Facility or MTF, the SMA is a component here, which tracks excess equity in their margin account and increases their buying power.

If you are someone with a margin account, your respective broker usually calculates excess margins that accumulate in your margin account after each trading day. This routine task allows your broker to transfer the additional margin to the SMA, enabling you to buy more shares.

However, not only is it your broker’s responsibility, but it is your responsibility as well to keep an eye on the SMA. You must track it to ensure that the value of your SMA does not fall below zero. Otherwise, a margin call generates from the end of your broker, asking for more assets or cash to fulfil the margin trading requirements.

Purpose of a Special Memorandum Account

The primary objective of an SMA is to track the additional margin capacity of your margin accounts that are remaining unutilised. Even though you can think of it as just a record-keeping approach, it serves the following different purposes:

• Usage of the Extra Margin

It accounts for the additional margins generated from gains while you trade in assets in the stock market. It also considers payments against the margin you use as an extra margin. Thus, any amount, either from gains or payments, that goes beyond the original requirement of your margin gets added to your special memorandum account. 

• Increasing Purchase Power

As the extra amount from gains or payments adds up to your memorandum account, it increases your buying power. Thus, without spending additional cash for investment, you can buy shares with this additional amount.

• Acts as a Market Cushion

As a trade, it brings you a benefit as it absorbs small price drops or market declines, so that you do not have to close your position forcefully. Thus, you can purchase fresh assets or stocks without adding fresh funds. Also, it helps you to monitor clearly how much margin room you are left with at any moment, making risk management easier.

• Helps Avoid Overleveraging

An SMA account in trading also helps avoid the risk of overleveraging. It is because it helps limit your trading to what your extra money or gains from equity can actually cover, ensuring a smart usage of your leverage. Thus, each rupee from your payment or gains from equity makes your trading efficient without adding additional risks.

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How Does a Special Memorandum Account Work?

To understand the working of an SMA account, you must note that, as a trader, whenever you deposit cash into your margin trading account or when the value of your held options or stocks increases, your broker records the additional amount into an SMA.

Also, if you receive a percentage from proceeds, dividends, etc, these amounts also get credited into your SMA.

To further have a glimpse of the workings of an SMA, you must note two of its signals. They are positive SMA and negative SMA. A positive SMA, i.e. above zero, acts as a line of credit, and you can withdraw such credits as cash to add more stocks to your portfolio.

On the other hand, a negative SMA, i.e. below zero, is always a bad sign for an investor. It shows a shortfall in the margin, triggering a margin call from your broker. In this case, you might need to add more cash or sell off a position to keep the margin requirement in check. Brokers can also liquidate your positions by themselves, leading to forced selling, which leads to financial losses.

Key Entries That Affect SMA Balance

Now that you know the SMA account meaning and how it works, you must know the key entries or transactions that increase or decrease the balance of the SMA account. Here is a detailed view of such entries so that you can manage your SMA efficiently:

•  Appreciation of Assets and Cash Deposits

If the market value of securities (e.g. stocks) increases, and it results in your margin requirement going beyond its original requirement, your broker records it. They put the additional amount into your SMA as a balance of it. Also, when you deposit cash to align with the margin requirement, but it exceeds, again, your SMA balance rises.

• Interests or Dividends

Suppose you invest in securities using an MTF that gives you interest or dividend payouts. Such additional cash flow from these means also adds up to your SMA. It increases your  SMA balance and helps maintain a positive SMA.

• Proceeds From Selling Securities

Even when your SMA is positive, if you sell off your positions of securities, the proceeds from it add up to your special memorandum account balance.

• Purchasing Securities and Cash Withdrawals

When you use the balance of your margin trading account or simply use the MTF to purchase securities, it impacts the balance of your SMA account. Also, when you use the SMA balance as cash to trade in securities, it reduces its overall balance.     

Example of a Special Memorandum Account

After noting the definition, working and entries impacting an SMA balance, to have a clearer overall, take a look at the following example. It showcases how generally the concept of the SMA account applies:

Suppose, as a trader, you buy 1000 shares of a publicly listed company at INR 50 per share with MTF. It means your total investment amount is INR 50,000. As your broker requires a   50% margin, you deposit INR 25,000 from yourself and borrow INR 25000 from your broker.

Now, the stock prices rally and go up to INR 70 per share, making your investment valued at INR 70,000. As your broker’s margin stays the same, now the value of your holdings becomes INR 70,000 – INR 25,000, i.e. INR 45,000.

However, we must not forget about the applicable margin percentage, i.e. 50% when the value of the held assets is appreciated. Thus, now the required margin of INR 70,000 is INR 35,000. Compared to the original margin requirement, it is INR 10,000 (INR 35,000 – INR 25,000) extra and thus adds to your SMA balance.

Important Points to Know About SMA

Whether you are already trading with an MTF or you are planning to do one, you must note some of the important pointers. It might help to maintain and utilise your SMA features efficiently:

• SMA Maintenance and Its Value

Your broker maintains an SMA alongside your margin trading account. Its value increases if the values of the underlying stocks or options, etc, also increase. However, if the value of these assets declines, your SMA balance or value does not go down.

• Excess Equity in an SMA

In a special memorandum account or an SMA account, excess equity or extra equity occurs if your margin trading account has an equity value more than required. Generally, for brokers, convert the excess equity to an SMA account when it has more than a prescribed equity of 50%.

• Transaction Consideration

When the equity amount is more than the prescribed value, and brokers transfer the excess to an SMA account, they follow a certain transactional rule. Brokers usually consider a single entry to an SMA account as a debit from the corresponding margin trading account. However, the same amount of debt and credit happens from and to the margin and SMA account.

Final Words

The SMA account is sort of a credit line that allows you to buy more stocks when you are participating in the stock market. It applies typically when you use a margin trading facility. When there is a surplus of equity value or cash more than prescribed in the margin account, your broker transfers the excess to your SMA.

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FAQs on Special Memorandum Account

1. What is an SMA in trading?

An SMA account is a special account for traders using margin trading facilities. Its value increases when the underlying stocks’ value increases more than the prescribed value (generally 50%). Also, when you add cash to the account more than the margin requirement, your broker transfers the excess to an SMA, allowing you to trade more without investing further.

2. Can money be withdrawn from an SMA?

Yes, you can withdraw or use the credit line of the SMA as cash and use it to purchase more stocks.

3. Does market value impact the SMA balance?

Yes, the appreciation of the prices of stocks increases the value or balance of your SMA. However, any decline in the stock’s value does not impact the SMA balance.

4. When is the SMA balance calculated?

Your broker calculates your SMA balance after each trading day. They do it to ensure that you have a positive SMA balance or have a balance that equals zero. Any negative SMA balance usually triggers a margin call.