FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client wants to establish a short position in ABC stock, currently trading at $60 per share, by selling short 100 shares. To do so, they must deposit the required margin. What is the minimum amount of cash the client must deposit under Regulation T?
- A$2,000
- B$6,000
- C$4,000
- D$3,000
Show answer & explanationAnswer & explanation
Correct answer: D. $3,000
For a short sale, Regulation T requires an initial deposit of 50% of the market value of the short sale or $2,000, whichever is greater. Here, the market value is 100 shares * $60/share = $6,000. 50% of $6,000 is $3,000. Since $3,000 is greater than $2,000, the client must deposit $3,000.
Why the other options are wrong
- A. This is the absolute minimum requirement, but 50% of the trade value is higher here.
- B. This is the full market value of the short sale, not the margin requirement.
- C. Incorrect calculation.
Short Sale Initial Margin (Reg T)
Regulation T mandates that for short sales, an investor must deposit cash or securities equal to 50% of the market value of the shorted stock, with a minimum requirement of $2,000.
- Applies to margin accounts.
- Minimum of 50% of market value.
- Absolute minimum is $2,000 (for sales under $4,000).
Memory trick: Short Sale: Half the Value, at least Two Grand.