I understand how the buying stock on margin works. E.g. if initial margin is 60%, maintenance at 25%, stock is priced at $50 and you buy 100 shares, then you would have to post your own money = 100 * 50 * 0.6, meaning you owe $2000 to the margin lender. If price rises or falls, only your equity would be affect, so if price is $51, margin loan remains at 2000, while your money becomes 3100. But how does it work when you short? Thanks a lot.
same way…except you make money when the price goes down and lose money when the price goes up. Instead of borrowing money, you are borrowing shares when you short sell. You borrow the shares from the lender then sell them. You hope the price goes down so you can buy it back cheaper and return it to the lender.
So if I short at stock costing $50, same margin requirements and maintenance, I put in my 3000, then what? How do you calculate the margin loan?
yeh what longoncfa said…its exactly the same… only has the opposite payoff… so: so you short 100 shares at $50… so your margin is the same… 60%*$50*100=3000
just not the difference in calculating the margin call price: long: Price * (1-inital margin/1-maintenance margin) short: Price * (1+initial margin/1+maintenance margin)