FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client wants to establish a short position in ABC stock, currently trading at $50 per share, in a margin account. Under Regulation T, what is the minimum initial deposit required for selling short 200 shares?
- A$10,000
- B$7,500
- C$5,000
- D$2,500
Show answer & explanationAnswer & explanation
Correct answer: C. $5,000
According to Regulation T, the minimum initial margin for short sales is 50% of the market value of the shorted securities, but not less than $2,000 for transactions under $4,000. For transactions of $4,000 or more, it's 50%.
Why the other options are wrong
- A. This is the market value of the short sale, not the initial margin deposit.
- B. This is incorrect. It would be 50% of $15,000.
- D. This would be 50% of $5,000, which is incorrect. The minimum is $2,000 for smaller transactions, or 50% for larger ones.
Short Sale Initial Margin (Reg T)
Under Regulation T, the minimum initial margin requirement for a short sale is 50% of the market value of the shorted securities, with a minimum of $2,000 for transactions under $4,000.
- Market value of short sale is the proceeds from selling borrowed shares.
- Investor must deposit cash or fully paid securities to meet margin.
- Margin accounts allow for leverage but increase risk.
Memory trick: Shorting stock means borrowing, and Reg T says you have to put up 'Half' the value, or at least 'Two Grand' to start.