Short Sales and Short Margin Accounts
Short selling inverts the margin arithmetic, and that inversion is where most errors occur. In a short sale, the customer borrows securities and sells them, creating a credit balance equal to the sale proceeds plus the required margin deposit. The account's equity is computed as credit balance - current market value of the shorted security. Because the market value can rise without limit, short accounts carry a higher maintenance requirement: typically 30% of the current market value for most equities (versus 25% for longs), with higher house requirements for low-priced or concentrated shorts.
Key concepts: the short sale proceeds are held as collateral and are not available for withdrawal; the customer must deposit initial margin (Reg T 50%) in addition to the proceeds; and the maintenance requirement rises as the stock price rises, producing calls quickly. Traps include: using the long maintenance formula for shorts; forgetting that dividends on shorted stock are owed by the short seller; and confusing the credit balance with free cash. Also note the short sale restriction rules and the locate requirement, which are separate from margin but often appear in the same question set. A rising stock price increases the maintenance requirement and simultaneously reduces equity, a double squeeze.
Worked example: Short 1,000 shares at $50 = $50,000 proceeds; deposit 50% = $25,000; credit balance = $75,000; equity = $75,000 - $50,000 = $25,000. If the stock rises to $60, market value = $60,000; maintenance requirement = 30% x $60,000 = $18,000; equity = $75,000 - $60,000 = $15,000, which is below the requirement, generating a call.