Short-Selling and Required Capital Question

Question

I am relatively new to stocks so I have a question. I have several companies in mind that I would love to short-sell in the coming days. I only have a couple thousand dollars in my online brokerage. So, let's say that I want to short 50 shares of a company selling at $300, so that's $15,000. Can I do this without having $15,000 in my cash position? Essentially, do I have to have capital equal to what I want to short or can I essentially borrow as many shares as I want so long as I understand the risk?

And, if I've shorted, can the $15,000 given on the trade be used to buy other stock....such as shorting another or going long?

Answer 1

First let me say that, if you are relatively new to stocks "Stay away from short-selling". This type of investing requires a lot more skill than going long on stocks. One good book to read before venturing into short selling is 'The Art of Short Selling' by Kathryn F Staley - 1997.

As for the Required capital question: in the scenario that you have described you will have a initial capital requirement of $7,500. The cash generated by the short sale is part of the capital requirements which is 150% of the initial amount of short sale. So no you cannot use the $15,000 given on the trade to buy other stock.

Any profit from the short sale can be used to invest in other stocks. And on the same note, any losses on the short sale may trigger a maintenance call based on maintenance margin requirements (varies from broker to broker - 25-40%) and you may have to send in more cash into your account.