Series 65: Short Positions In Margin Accounts

Short Positions in Margin Accounts

An investor who thinks the price of a security will drop in the future can try to profit from this belief by selling short. To sell short, an investor borrows securities, sells them, and then repurchases the securities in the future (the investor hopes at a lower price) to return to the lender. If successful, the short seller pockets the difference minus any trading costs.

An investor who thinks the market, or a particular security, is going to decline in value is said to be bearish. Therefore, selling short would be a bearish position.

• • Note: The maximum loss a bullish investor (an investor who goes long) can have is the price of the security. The maximum loss a short seller can have is theoretically unlimited, due to the unknown levels to which the price of a security may rise.

An investor must open a margin account to sell short and must deposit at least 50% of the short market value of securities. The accountholder must keep at least 30% of the short market value (SMV) in equity in the account. This is the minimum maintenance requirement. In addition, the customer must always maintain at least $2,000 in a short account.

The relevant equation is:

credit balance â