Saturday, September 19, 2009

margin account, briefly

By definition, an account holds securities. A margin account can hold long securities, short securities, long cash and short cash.

When you short 500 of IBM, sales proceeds go into margin account to cover the short position, since you are expected to buy back the stock.

The *equity* of the margin account is simply what is left when the debit balance is paid in full or the shorted stocks have been bought back and returned to the lender. Equity doesn't mean stock. It probably means the total value of stocks and cash. For long accounts, Equity = long MV - DR ie debit balance.

The amount of margin (available to investor, calculated by House every day) will depend on the price of the securities. If margin is used to buy securities, then the amount of margin increases with price, but if the margin is used to short securities, then the amount of margin is inversely related to the price of the shorted securities, and vice versa.

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