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Hi guys,
I have this example taken from MetaStock User's Manual:
"Short intial is the percentage is used to calculate the equity necessary to open a short position on margin. The percentage can be as low as 101% and as high as 200%. For example, if the account balance is $5,000 and the Short Initial is 150%, the system would allow a short sell of $10,000. At 110% and $5,000, it would allow a short sell of $50,000. At 200% and $5,000, it would only allow a short sell of $5,000."
I am very confused as I could not figure out a way to get to that figure shown above.
Could anyone help?
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In short trades, you are borrowing a certain amount and making the rest up from your own account. The margin determines what percentage of the trade comes from your account. The first 100% is the value of the stock and the second 100% is the insurance against the trade going against you (the margin). Therefore, if the margin is set to 150% and you have $5000:
100% is from the value of the security you borrow.
50% is provide from you account
the other 50% is accounted for by the broker
therefore:
trade size (100%) = $5000 (your equity, 50%) + 50% (loan from broker)
since you provided half, when the broker provides the other half, you have a combined $10,000 in equity. This is put up against the $10,000 in securities you are borrowing for the short trade.
Alternately, if you are providing the full insurance yourself and not trading on the margin, then the short initial would be set to 200%
100% from the sale of the securities
100% from your account to insure the value of the borrowed securities
Since your share equals the size of the trade, the trade is limited to the $5,000 in your account.
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