How does margin work with shortselling?

Question

Let's say I have 10000 in my account and a short sell 5,000 dollars worth of stock and I have 50% margin what is my potential buying power of my account? I just don't get how short selling impacts buying power.

Answer 1

First off, you can only short sell a stock inside a margin account.  Why?  A short sale is essentially a purchase on margin.  Instead of borrowing money to buy stock, you borrow the actual stock itself.  The value of the borrowed stock is the amount of the margin loan and you have to pay your broker's margin rate on the outstanding shares.

So if you have $5k available in margin and you short $5k worth of stocks, then you're fully margined.  Your residual buying power is whatever equity you have left, $10k.  If you invest the 10k and it loses value, you may be subject to a margin call to cover your short position.

Hope this helps.

Answer 2

I have not been able to figure it out myself.  I called customer service and had it explained to me.  I don't remember.  I gave up and just watch the little box that show my buying power in the little box on my trading screen.  This is really bad, because this is what I do for a living.

This probably doesn't answer your question, but I had to make some comments which I hope will be helpful.

You shouldn't take any position with half your trading capital.

Peter is really timid and it's hurting him.  He acts like being long is a virtue.  It isn't.  It isn't good or bad.  It's just the opposite of being long.  He talks about the "infinite" losses possible.  Only if you're drunk and passed out on the floor.  If you're monitoring your positions, you get out when it goes against you.  Just like if you're long.  People who owned Enron lost 100% by not getting out when it started to go down.  They may as well have been passed out.  Short traders made a fortune riding Enron down.  Peter is probably sitting on large losses, having been long in a bear market, instead of reversing and making some money.

And then he says he owns DUG which is short oil.  He has no clue.  DUG is trying to be the doulbe inverse of the Dow Oil and Gas Index which is composed of STOCKS in the oil, gas and related services industries.  It is not a measure of the commodity, oil.  He brags about avoiding margin but invests in something like DUG which is leveraged.  That's what margin is: leverage.  More opportunities going bye-bye for Peter

Answer 3

First, shorting is insanely dangerous if you don't know what you're doing. I've been investing for 20 years and I've done precisely one short sale directly on a stock.

When you short a stock the potential losses are endless, if the stock triples, you owe the difference between where you shorted the stock to where it ends up.

Shorting stocks that pay dividends means that YOU pay the dividends. If you short Citibank -- you pay the dividends to people who own the stock.

If wish to short something I would recommend finding an ETF that is short a particular index or commodity. Right now I have one of these DUG which is short oil.

I won't say never use margin, but only with extreme caution and for small moves. Using margin can mean that you owe more than you have if you bet incorrectly.

I hope that helps.

Answer 4

Whatever amount you have cash available for trading just double the amount by taking it times two, as the amount of stock you can sell short at the time or buy at that time. With $10,000 you can short a maximum of $20,000 in stock, which is the same if you buy you can buy $20,000 in stock. Your using $5,000 in a short sale you have used 25% of your selling or buying power, so you still have $15,000 left of buying power for selling, buying or both together on stocks trading above $5.00 per share. The thing to remember is always multiply the cash in your account by two to tell you the amount of stock you can buy or short using 50% Reg-T margin rules.

There is also the newly implemented U.S. Securities and Exchange Commission's SEC - Modern Portfolio margin rules that allow much more buying power, which is more complex to calculate and best to leave up to the computers to track.

Most traders over trade by using to much buying power and loose their funds in short order unless well diversified and hedging the short positions with long positions at the same time. Margin should be used sparingly unless almost fully hedged with about equal amount of long and short positions or protected using options positions of some kind.