Now that you understand the purpose of the short position, you need to know how to account for it in terms of market value.
The current initial Reg T requirement is the same, long or short: 50% of market value. Essentially, the investor must deposit half the proceeds of a short sale into the margin account: for example, if he wanted to short $100,000 worth of shares, he would have to put $50,000 of that directly into the account.
Let's see how that works:
$100,000 Long Market Value
$50,000 Debit Balance
$150,000 Credit Balance
Exam Tips and Tricks
For your exam, remember that on the short side, a margin account will always have a credit balance.
As you know, the short seller takes a loss if the stock price goes up after the transaction. Unless the transaction constitutes a wash sale, the investor is allowed to take the loss for tax purposes.
Costs And Fees Associated With Investments
TradingThis strategy can help in market downturns, but it's not for inexperienced traders.
InvestingIf more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
Managing WealthTo be a good value investor, you need to find and buy bargain stocks but more importantly, you have to stick to the trade until the market recognizes the worth of these securities.
InvestingShort selling has a number of risks that make it highly unsuitable for the novice investor.
InvestingThe media demonizes naked short selling, but in most cases it occurs in a collapse, rather than causing it.
TradingWant to profit on declining stocks? This trading strategy does just that.
TradingThis figure can be a real eye-opener about the market sentiment surrounding a given stock.
TradingShort selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.