I am trying to understand the required balance for short selling.
Suppose I want to short a certain stock for a total value of 10000$.
What must I have in my account to perform the sale and to maintain the position? Must I have this balance in cash or can it be in other shares?
Now I perform the sale and get 10000$. Can I use this money to buy other shares? Can I get interest for this money? Do I pay interest for this money?
I know these rules can change between brokers, but I want to understand how it usually goes and an example from any big broker will be welcome.
I'm more familiar with Portfolio Margin than Reg-T Margin. So I can only answer your question that way. With a PM account:
-If you're short an equity that is marginable, the requirement is 15%, or $1500 on this example. If the stock goes down in value, you'll have to have 15% on the current value to not have a margin call.
-You can have that balance from other securities that are marginable, with available margin.
-No you can't use the credit balance to buy other shares, because you did not own the shares you delivered, you had to borrow then from another party, leaving your 15% as collateral for the short.Your prime broker takes that credit balance and can make money on it, sharing the income with the firm that lent them the shares. Currently, interest rates are too low to make substantial money on those balances.
-No one with interest rates this low is receiving interest on credit balances. If interest rates go up, and you have that type of relationship with your broker, it's possible to receive a portion of the interest on the credit balances.We offer that to our institutional clients, but most retail accounts don't.
One other point. If the stock is not on the "easy to borrow" list, there is a fee for borrowing the stock for the short sale. When you're short those securities, you first have to obtain permission from your broker to short that security (called a locate), then you will PAY interest every day to maintain your short.
I hope this helped. If you're in a Reg-T margin account, I don't know the rules. They would be much more restrictive.
Bob
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Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue,Englewood, NJ 07631
[email protected]
office: 646-545-3860
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