Tuesday, May 18, 2010

Half again as much

Many Series 7 candidates struggle with the initial credit created in a short margin account. The way to check your work--if you get such a test question--is to make sure that whatever the amount of the stock, the margin customer's initial credit is "half again as much." If he sells $40,000 short, his initial credit is $60,000. If he sells $100,000 of stock short, his initial credit is $150,000.
Because Reg T is 50%. He receives the cash for the sale of securities, plus he deposits half that amount in cash, and ends up with "half again as much." So, the following question should be fairly easy:

A customer sells 1,000 shares of ABC common stock short @45. Therefore, his initial credit in the short margin account is:
A. $45,000
B. $67,500
C. $50,000
D. $90,000

EXPLANATION: again, the short seller receives the proceeds of $45,000, plus he deposits half that amount ($22,500) to meet the Reg T requirement. Add those two numbers together, and you see that the answer is . . . .


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