Customer Accounts - Market Value of a Short Position

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.

The credit balance and the equity are the same only on the long side. To come up with the equity on the short side, you have to subtract out the short market value, which is the total market value of all securities sold short through the margin account, as of the previous close. In our example, that initial amount would be $100,000, the sale proceeds. Thus, the equity initially would be $50,000, the cash deposited to meet the margin requirement.

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
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