How to short sell in a margin account
About this lesson
In this video, we will discuss the mechanisms of short selling in a margin account, how much deposit you need to make against the short position, and when you receive the margin call.
Short sales need a margin account
When you short a stock, the proceeds of the sale stay in your account, and you must deposit extra money as margin. It protects the broker in case the price rises and you can’t buy the shares back.
Example
You short 1,000 shares at $100. The sale brings in $100,000. With a 50% initial margin, you must deposit another $50,000.
| Assets | Liabilities and equity | ||
|---|---|---|---|
| Cash from the sale | $100,000 | Short position (1,000 shares × $100) | $100,000 |
| Your deposit | $50,000 | Equity | $50,000 |
| Total | $150,000 |
The margin on a short position
Margin = Equity ÷ Value of the shares owed
Equity = Total assets − Value of the shares owed
- If the price falls to $70: equity = 150,000 − 70,000 = $80,000; margin = 80,000 ÷ 70,000 = 114%. You’re doing well.
- If the price rises, the shares you owe are worth more, and your equity shrinks.
When do you get a margin call?
With a maintenance margin of 30%, solve for the price P:
(150,000 − 1,000P) ÷ 1,000P = 0.30
150,000 = 1,300P → P = $115.38
If the stock rises above about $115, you must add money, or the broker buys back shares to close part of your position.
General formula
P = Total assets ÷ [Shares × (1 + Maintenance margin)]
This lesson is for education only and isn’t investment advice.
Next chapter: risk and return.