Margin Question

Eldredge · Oct 8, 2001

Sorry if this has been covered, but I couldn't find an answer.

Can somenone please explain margin on a short sale? I have an account with IB, and I'm not clear on what margin is required for a short sail. I called the help desk but I don't think he really knew. He claimed that my buying power would actually increase when I put on a short position. That doesn't seem right. What is the margin requirement for a short sale? For example, if I short sell $10,000 worth of xyz, how is my buying power changed ($10,000 will be deposited to my account, but how much more margin will be required)?

Thanks for the help.

ddefina · Oct 8, 2001

I have $8,821 of stock short in my IB account. It currently reads

Initial margin requirement: $4,410
Maintenance Margin requirement: $2,823

I am classified as a daytrader (even though I don't daytrade) with 4 to 1 margin.

Initial margin requirements:

For a purchase of marginable stock, 50% of the purchase price, with a minimum account equity of $2,000

For a short sale of stock the greater of:
50% of the sale price; or the short sale maintenance margin requirement (see below)

Maintenance margin requirements:
To prevent an automatic liquidation, the account must meet minimum maintenance requirements

For stock purchases:
30% of the current market value of the long securities positions in marginable securities;
100% of the current market value of the long securities positions in non-marginable securities;
$2000 minimum account equity for all margin transactions
For short stock sales:
30% for underlying stock priced $17.00 per share or more; or $5.00 per share for stock priced between $5.00 and $16 7/8 per share; or
The greater of 100% or $2.50 per share for stock priced less than $5.00 per share;
$2,000 minimum account equity for all margin transaction

Eldredge · Oct 8, 2001

ddefina,

Thanks for the reply. I'm afraid I'm being a little dense. You had $8,821 deposited to your account when you ss the stock, and there is a $4,410 initial margin requirement, and $2823 maintenance requirement. Are those requirements in addition to the $8,821 received from the sale? If so, then the requirements for the short sale are the same as for a long purchase, and the receipts for the short sale have no impact on buying power. Is that right? Thanks again.

ddefina · Oct 9, 2001

Originally posted by Eldredge
ddefina,

Thanks for the reply. I'm afraid I'm being a little dense. You had $8,821 deposited to your account when you ss the stock, and there is a $4,410 initial margin requirement, and $2823 maintenance requirement. Are those requirements in addition to the $8,821 received from the sale? If so, then the requirements for the short sale are the same as for a long purchase, and the receipts for the short sale have no impact on buying power. Is that right? Thanks again.

I may be wrong, but I don't believe the cash received increases buying power. To the contrary, it takes up available margin. Also, some brokers pay interest on the short account money, but I don't know if IB does?

To me it wouldn't make sense to have your buying power increased from a short sale, because the risk isn't in the asset you have in your account (stock or cash), but in the market fluctuations of the stock, and that risk remains the same whether you possess stock or cash as collateral. I'm sure Def can give you a more definitive answer though.