FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client sells short 100 shares of XYZ stock at $40 per share in a margin account. Under Regulation T, what is the minimum initial deposit required?
- A$4,000
- B$8,000
- C$6,000
- D$2,000
Show answer & explanationAnswer & explanation
Correct answer: D. $2,000
The total value of the short sale is 100 shares * $40/share = $4,000. Under Regulation T, the initial margin requirement for short positions is 50% of the sale price. So, 50% of $4,000 is $2,000. FINRA rules also state that the minimum initial equity for a margin account is $2,000, and since 50% of the market value is $2,000, this is the amount required.
Why the other options are wrong
- A. This is the total value of the short sale, not the required initial deposit.
- B. This amount is incorrect for this calculation.
- C. This amount is incorrect for this calculation.
Short Sale Initial Margin (Reg T)
The percentage of the short sale value that a customer must deposit as collateral when selling securities short on margin, as set by the Federal Reserve Board.
- Currently 50% for most equity securities.
- Applies to the total market value of the securities sold short.
- FINRA also has a minimum initial equity requirement of $2,000 for short accounts, which applies if 50% of the short value is less than $2,000.
Memory trick: Shorting means you 'owe' half initially.