Series 27: The Price Increases

The Price Increases

Now let’s examine what happens when there is an increase in the price of a stock that is held in a short margin account. Remember that an increase in the price of a security is not good for a short seller.

If XYZ increases to $40 per share, short market value for Candy is now $40,000, reducing Candy’s equity to $5,000. To maintain her initial margin requirement, Candy would need to have equity equal to $20,000 (50% x $40,000). This would require an additional deposit of $15,000, exactly the amount of increase in the security’s SMV.

credit balance – SMV = equity

$45,000 – $40,00