This question came for the question 3 on reading 52 (p37 on CFAI book). It states, you decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly hight of 56. Your broker tells you that your margin requirement is 45% … The answer of this question calculated the inital investment by applying the margin requirement as: $56 * 100 * 45% = $2,520. My question is, when selling short, you got the cash from the short sell, basically there is no need for you to put money in. How is the margin benefit you?
Because as soon as the price increases you’ll be in a house call and responsible to put up the difference.
“Short sellers have to deliver the securities to their broker eventually. At that point they will need money to buy them, so there is a credit risk for the broker. To reduce this, the short seller has to keep a margin with the broker.” This is actually the main reason why you need margin in order to short.
And that you get little or no interest on it might have something to do with it too.