Trigger price (short sales) = initial purchase price * ((1+initial margin) / (1+maintenance margin)) assume you short a $40 stock. if the initial margin requirement is 50% and the maintenance margin requirement is 30%, at what price will you get a margin call? answer: (40*(1+.05))/1+.3=$46.15 I cannot understand even the concept behind the margin for the short sale: for the shorting of a $40 stock, what amount must one put up in margin? if the initial margin requirement is 50%, must one put up $20? at the trigger price, what conceptually is happening? the initial margin you had put up now represents what? i fully understand the margin requirement concepts in the context of the “long” margin purchase but not in the context of the short sale. any commentary or explanation would be much appreciated. Thank you.
See man, Short sale means you are borrowing some stocks and selling it in the market having an obligation to buy back the shares again. You are having an expectation that share price will decline and you will buy back it at a lower price. But what if instead of falling, the stock price started to rise? So the person who lend you the stocks will maintain a margin so that if the stock price rises beyond that limit you will get a margin call. According to your question, 50 % initial margin so initial margin requirement was 40*1.5=60. and margin requirement is 30 % means it will be 60/1.3= 46.15. If stock price rises above that 46.15, you will get a margin call.
Right, but if you short a $40 stock, you only need to have $20 per share on hand when you start. You will receive $40 from the sale of the stock after you borrow it leaving you with a total of $60 in the bank.