A client sells short 100 shares of XYZ stock at $50 per share in a margin account. Under Regulation T, what is the minimum initial margin deposit required?
- A$2,000
- B$3,000
- C$2,500
- D$5,000
Show answer & explanationAnswer & explanation
Correct answer: C. $2,500
For short sales, Regulation T requires an initial margin deposit of 50% of the sale proceeds. However, there's also a minimum requirement: for short sales between $5 and $16.67 per share, the minimum is $2,000 or 100% of the market value, whichever is greater. For shares sold short at $16.67 or more, the minimum is 50% of the market value.
Why the other options are wrong
- A. This is the general minimum for transactions under $4,000, but 50% of $5,000 is higher.
- B. This is an incorrect calculation or misapplication of the rules.
- D. This represents 100% of the short sale value, which is not the Reg T initial margin for this price.
Short Sale Initial Margin (Reg T)
For short sales, Regulation T requires an initial margin deposit. If the stock is sold short at $16.67 or more per share, the margin requirement is 50% of the market value. If the stock is sold short between $5 and $16.67 per share, the minimum margin is $2,000 or 100% of the market value, whichever is greater. Below $5, it's $2.50 per share or 100% of the market value, whichever is greater.
- Generally 50% of the market value for stock sold at $16.67 or more.
- Minimum $2,000 for sales between $5 and $16.67/share (or 100% of market value if greater).
- Minimum $2.50/share for sales below $5/share (or 100% of market value if greater).
- The purpose is to cover potential losses if the stock price rises.
Memory trick: Short sales need '50 percent' or 'two grand' protection.