How to Sell Short-Margin Interest
- 1). Review the basics of short-selling and margin. Be sure that you understand any fees associated with margin and short-selling. When you borrow from your broker, you will be charged margin interest based on the broker's stated rates. When the total equity in your account is below 100 percent, you are "on margin" with your broker and may incur interest charges.
- 2). Ensure that your account has margin privileges. If your account does not have margin privileges, or if you are unsure, contact your broker. The Financial Industry Regulatory Authority (FINRA) requires an account to have a minimum of $2,000 or 100 percent of the purchase price, whichever is less, in order to trade on margin. Some brokers will have a minimum margin account balance that is higher than this minimum. If your account equity falls below this minimum, you will be unable to place trades on margin.
- 3). Review the margin requirements of the security you are selling short. When you sell short, you must have sufficient buying power in your account to purchase back the shares at any time, regardless of the price. This can include cash held in your account, such as the proceeds from the original sale of the stock, or can include purchasing power available from the margin line of credit. If you have insufficient cash to make the purchase, the amount held from your purchasing power to cover the short position may incur interest charges.
Different securities may have different margin maintenance requirements. Maintenance is the level of equity required in your account at any time to maintain your short position. Most stocks trading over $3 a share will have a maintenance requirement of 50 percent of the value of the stock, although special margin requirements may be in place. Be sure to research the margin maintenance requirements from your broker, and be aware that they are subject to change. - 4). Estimate your margin-interest expense. Although this step surely isn't required, it is highly encouraged. There are a number of factors to consider including changes to margin interest rates, changes to your client status with your broker, and changes to margin requirements for the specific stock. Knowing how much an investment is costing you in interest is an important factor when deciding to begin or exit from an investment.
- 5). Monitor your account; review your trade confirmation(s) and monthly statements. When the equity in your account falls below the minimum requirements of your broker and the industry regulatory bodies, your account will be in a "margin call." Whether or not your broker actually informs you of this call and provides you with time to raise the level of equity in your account is at the discretion of the broker. The brokers are not required to inform you that your account equity has fallen and may sell your securities to cover the call without consulting you first, as the collateral for their loan to you is the securities located in your account.