Short account definition
/What is a Short Account?
A short account is the trading account held by an individual who engages in short selling. Short selling involves the borrowing of securities from another investor, selling them on the open market, and then buying them at a later date when the price will presumably be lower, and returning them to the other investor. If the price of the security drops during this period, then the short seller makes money.
A short account is a margin account that is required by regulation to contain the full amount of a short position, plus an additional 50% margin requirement. This arrangement creates collateral that the short seller makes available in case he loses money on his short positions and has to pay out. The brokerage firm with which the account is held may demand a larger fund balance if the short position is losing money.
Characteristics of a Short Account
The key characteristics of a short account are as follows:
Margin account requirement. Short selling requires a margin account, meaning the investor borrows shares from the broker to sell them. Brokers require a minimum margin balance, as short selling is a leveraged strategy.
Use of borrowed securities. The investor does not own the shares being sold; they are borrowed from the broker.
Obligation to buy back shares. The investor must repurchase (cover) the shares to close the short position. If the stock price drops, they can buy back at a lower price, making a profit. If the stock price rises, they face unlimited potential losses.
Interest owed. Since short sellers borrow shares, they pay interest on the borrowed amount.
Margin calls. If the price of a borrowed security increases too much, the broker may issue a margin call, requiring the investor to deposit more funds or close the position.
Dividend obligation. If the borrowed stock pays dividends, the short seller must compensate the lender for those payments.