Financial Technology & Automated Investing. When the shares are first sold short, the investor receives the cash amount of the sale in his or her margin account. In contrast, accounts that normally have a debit balance include the asset, loss, contra-liability, owner's drawing, dividend and expense accounts. Financial Accounting with Connect Plus (8th Edition) Edit edition. Following our Facebook short selling example above, let’s examine the credit balance following changes in the price of FB. The short seller is required to deposit additional margin in the account when the margin falls below the total margin requirement of $18,000. Fact Check: What Power Does the President Really Have Over State Governors? The two factors that change with market fluctuations are the value of equity (or margin) in the account and the cost to buy back the borrowed shares. A short sale is the sale of an asset or stock that the seller does not own. The credit balance is the sum of the proceeds from a short sale and the required margin amount under Regulation T. In short selling, an investor essentially borrows shares from his or her broker and then sells the shares on the open market, hoping to buy them back from the open market at a lower price at a later date, and then return the shares to the broker, pocketing any excess cash. Problem 75MCQ from Chapter 3: Which of the following accounts normally have a credit balan... Get solutions Credit balance is the amount of borrowed funds, usually from the broker, deposited in the customer's margin account following the successful execution of a short sale order. Since the risk of loss from short selling is high, given that the price of a share can increase indefinitely, a short seller is required to deposit additional funds in the margin account as a buffer in case the stock increases to the point of loss for the seller. An investor with a $500 cash balance may want to purchase shares worth $800. Also, the margin following the price increment now falls below the Reg T 50% requirement since $4,000/$50,000 = 8%. In accounting, when one account gets a credit, another gets a debit, so there is a balance in the accounting equation. The margin requirement of 150% means that the investor has to deposit 50% x $36,000 = $18,000 as initial margin into the margin account, for a total credit balance of $18,000 + $36,000 = $54,000. A bear trap denotes a decline that induces market participants to open short sales ahead of a reversal that squeezes those positions into losses. QUESTION 6 / 11 Which account typically carries a credit balance? The 150% margin requirement is the credit balance required to short sell a security. The accounts that have a normal credit balance include contra-asset, liability, gain, revenue, owner's equity and stockholders' equity accounts. Looking at the table, you can see that a price decrease or increase did not change the value of the credit balance. Credit balance refers to the funds generated from the execution of a short sale that is credited to the client's account, including margin requirements and available funds. Get more help from Chegg. The proceeds must be maintained in the investor's margin account as a form of assurance that the shares can be repurchased from the market and returned to the brokerage house. The debit balance in a margin account is the amount owed by the customer to a broker for payment of money borrowed to purchase securities. In effect, the funds cannot be withdrawn or used to purchase other assets. The accounts that have a normal credit balance include contra-asset, liability, gain, revenue, owner's equity and stockholders' equity accounts. Which Accounts Have a Normal Credit Balance. Since the shares being sold are borrowed, the funds that are received from the sale technically do not belong to the short seller. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Remember that short sellers hope that the stock’s price will drop so they can buy back the borrowed shares at the lower price to earn a profit. Credit balance is the amount of borrowed funds, usually from the broker, deposited in the customer's margin account following the successful execution of a short sale order… When the price of FB shares increases from $180 to $250, the market value of the shares increases by $14,000, which reduces the margin to $4,000 ($18,000 – $14,000). The credit balance in a short margin account is constant; it does not change regardless of price volatility. A margin account allows an investor or trader to borrow money from the broker to purchase additional shares, or in the case of a short sale, to borrow shares to sell. 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