The Short Account Dividend Debit
A customer shorts 1,000 shares of DEF at $80, proceeds $80,000. The account has a credit balance of $80,000 plus the required 50% margin deposit of $40,000, for total credits of $120,000. Two weeks later DEF declares a $1.00 per share cash dividend payable to holders of record Friday. The customer also sells 500 shares of another long position, GHI, at $40 to cover part of the short, generating $20,000. The customer asks why the account was debited $1,000 on the payable date and whether the GHI sale can offset the debit.
1. Explain the $1,000 debit and whether it is a margin call.
Read the worked answer
A short seller does not own the shares and is not entitled to the dividend; the lender of the shares is. The firm must pay the dividend to the lender and passes the cost to the short customer, debiting the account $1,000 (1,000 shares × $1.00). This is not a maintenance call; it is a reduction of the customer's equity in the short account. The debit increases the amount the customer owes, effectively raising the debit equivalent. The customer's equity falls by $1,000, and the firm should notify the customer of the charge and its basis. The customer cannot avoid it by selling other securities; only buying in the short position before the record date would have avoided the obligation.
2. After the GHI sale and the dividend debit, compute equity and determine whether a maintenance call exists, assuming DEF is still at $80.
Read the worked answer
Short account equity = credit balance − market value of shorted stock. Credits: $120,000 original + $20,000 GHI proceeds − $1,000 dividend debit = $139,000. Short market value = 1,000 × $80 = $80,000. Equity = $139,000 − $80,000 = $59,000. FINRA maintenance on shorts is 30% of short market value = $24,000; equity far exceeds that. However, the GHI sale proceeds are cash in the account; if the customer withdraws them, equity drops to $39,000, still above $24,000. A call would arise if short MV rose so that equity fell below 30% of MV: with credits fixed at $139,000, equity = $139,000 − MV, requiring $139,000 − MV ≥ 0.30 × MV, or MV ≤ $106,923, i.e., DEF up to about $106.92. At $80 no call exists. The firm should still confirm the GHI sale settled and the $20,000 is available.