Quick Answer
Short-account equity is the Credit Balance minus Short Market Value (Equity = CR - SMV). The credit balance is fixed at inception at 150% of SMV (100% proceeds plus 50% Reg T deposit). Equity moves opposite the stock price: it rises when the price falls and falls when the price rises, the mirror image of a long account.
Now that you understand long margin accounts, short accounts follow the same logic in reverse. Where long accounts use debit balances, short accounts use credit balances. Where long accounts profit from rising prices, short accounts profit from falling prices.
Key Terms and Formulas
| Term | Definition | Formula |
|---|---|---|
| Short Market Value (SMV) | Current market value of securities sold short | Price x Shares |
| Credit Balance (CR) | Total funds in the account (sale proceeds + customer deposit) | Fixed once established |
| Equity | Customer's ownership stake | CR - SMV |
| Regulation T (Reg T) Requirement | Total of 150% of SMV (100% proceeds + 50% deposit) | SMV x 150% |
The key formula: Equity = CR - SMV (compare to long: Equity = LMV - DR)
The 150% figure applies to a standard short sale of a margin equity security. Shorting an exempt or non-equity security instead requires 100% of market value plus good-faith margin, and shorting against a qualifying convertible or exchangeable long position can reduce the requirement to 100%; the examples below use the standard equity case.
Initial Short Sale Example
A customer sells short 100 shares of ABC at $50/share:
- Short sale proceeds: $5,000
- Reg T deposit (50% of SMV): $2,500
- Credit balance: $7,500 (proceeds + deposit)
- Short market value (SMV): $5,000
- Equity (CR - SMV): $2,500
The credit balance is $7,500, consisting of the $5,000 sale proceeds plus the $2,500 Reg T deposit. The credit balance is fixed (like the debit balance in a long account); it does not change with market fluctuations. The 150% Reg T requirement ($7,500) equals the credit balance at inception.
Exam Tip: Gotchas
- The credit balance is locked in against market fluctuations. Unlike market value, which moves daily, the credit balance does not change just because the stock price moves; it changes only through customer activity like an additional short sale, deposit, or covering purchase. This mirrors how the debit balance (DR) is fixed in a long margin account.
- Reg T for short sales requires a 150% credit balance (100% proceeds + 50% deposit). At inception, the credit balance always equals exactly 150% of SMV.
Price Decline (Favorable for Short Seller)
If ABC falls to $40/share:
- Credit balance: $7,500 (unchanged)
- SMV: $4,000
- Equity (CR - SMV): $3,500
- Reg T requirement (50% of $4,000): $2,000
- Excess equity: $1,500
The short seller profits when the stock price falls because equity increases. Excess equity can be used for additional short selling. Selling power equals 2 x SMA (Special Memorandum Account).
Think of it this way: You sold something at $50 hoping to buy it back cheaper. When the price drops to $40, your potential profit grows, and your equity in the account reflects that gain.
Exam Tip: Gotchas
- Short seller equity moves opposite to the stock price. Price down = equity up. This is the reverse of a long account where price down = equity down.
Price Increase (Unfavorable for Short Seller)
If ABC rises to $56/share:
- Credit balance: $7,500 (unchanged)
- SMV: $5,600
- Equity (CR - SMV): $1,900
- Reg T requirement (50% of $5,600): $2,800
- Account status: Restricted (equity < Reg T), but not yet a maintenance call (equity is 33.9% of SMV, still above the 30% floor)
Rising prices erode a short seller's equity. The account becomes restricted when equity falls below the Reg T requirement, but no maintenance call is issued unless equity drops below 30% of SMV.
Exam Tip: Gotchas
- A restricted short account is not the same as a maintenance call. The account is restricted (no new short sales without depositing more), but the broker does not force liquidation until equity falls below 30% of SMV, the FINRA minimum. A firm's higher house requirement can trigger a call sooner; the exam tests the 30% FINRA floor unless it says otherwise.
Long vs. Short Account Comparison
| Feature | Long Account | Short Account |
|---|---|---|
| Fixed value | Debit balance (DR) | Credit balance (CR) |
| Variable value | Long market value (LMV) | Short market value (SMV) |
| Equity formula | LMV - DR | CR - SMV |
| Profit when | Price rises | Price falls |
| Maintenance minimum | 25% of LMV | 30% of SMV |
| Buying/selling power | 2 x SMA | 2 x SMA |
Exam Tip: Gotchas
- Short maintenance (30%) is higher than long maintenance (25%). Short selling carries unlimited risk (no cap on how high a stock can go), so regulators require a larger equity cushion.
- The exam tests whether you can apply the right formula. Long equity = LMV - DR; Short equity = CR - SMV. Mixing them up produces the wrong answer on every calculation question.
What Should You Check on Exam Day?
- Start every short-account problem from Equity = CR - SMV
- Remember the credit balance is fixed at 150% of SMV at inception and never changes with the market
- Price down helps a short seller (equity up); price up hurts a short seller (equity down)
- Short maintenance (30% of SMV) is higher than long maintenance (25% of LMV) because short risk is theoretically unlimited