The Adjusted Debit Balance (ADB) is a formula used in a margin account, a type of brokerage account where a customer can borrow money from a broker rather than the customer putting the money upfront. The customer can use this money to purchase stocks or other financial products. The customer obtains more purchasing power but must pay a monthly interest rate for the privilege.

We write ADB as ADB = balance owed - paper profits on short accounts. The ADB finds the overall amount owed from all securities and subtracts unrealized profits from short accounts. Together this works out a final debit on the account, which we can use to determine how much the customer owes.

When a customer overdraws their margin account, it may lead to what is referred to as a "margin call," where the broker makes a demand that the customer invests additional money or securities into the account to make up the balance. The ADB tells us how much the customer owes the broker in the event of a margin call. It's worth pointing out that in these circumstances, a broker can unilaterally choose to liquidate securities to bring the account up to balance.

Let's say you want to buy a security at \$1,000 where you will put \$500 down in cash yourself and use the margin account for the remaining \$500. If the stock price rises to \$2,000, then you have made a 300% profit on your invested \$500. If the price falls to \$250, then you have lost all your invested \$500, and you now owe the remaining \$250 in the stock price. This situation is where ADB is applicable.

In reality, a margin account will include numerous securities that will be totaled together. So for this example, let's use the following hypothetical securities.

• Security 1: +\$300
• Security 2: +\$100
• Security 3: -\$800
• Security 4: -\$1200
• Security (short) 5: +\$200

The balance is found by totaling the first four securities, resulting in an overdrawn balance of \$1,700. To find the adjusted debit balance, we subtract the profits from the short security to make an adjusted debit balance of \$1,500. This is the amount owed to the broker by the customer.

## History of Adjusted Debit Balance

When margin accounts were first created in the late 1800s, brokers were free to offer these accounts with no regulated minimum balance. This led to a spectacular number of profits but also numerous margin calls and losses. The disastrous stock market crash of 1929 involved several investors who purchased stocks on margin.

Regulation quickly followed, including the "50% rule." Introduced by the Federal Reserve Board, the rule stipulates that you can only buy 50% of security by borrowing from your broker, and you must pay the rest in cash. One of the regulations, Regulation T of the Federal Reserve Board, introduced the Adjusted Debit Balance as a formula for determining the position of a margin account in the event of a margin call.