How Collateral Accounting Works in a Short Sale

Summary

The document asks how collateral affects the cash flows of a short sale. Its example sells borrowed shares for $100, sets aside $50 under a 50% collateral requirement, and later faces a $150 repurchase cost after the share price rises from $10 to $15. The question is whether the remaining $50 from the sale proceeds counts as a gain after the collateral is depleted.

The answer points out that the account must cover the short position’s full closeout cost: the trader needs $150 against the short and loses that amount when buying back the shares. The initial sale proceeds are part of the transaction’s funding, not profit that can be counted separately from the cost of closing the position. The exchange is brief and does not explain margin mechanics in detail, such as how collateral requirements may change or how broker-specific account rules work.

Key ideas

• Short-sale proceeds do not eliminate the cost of buying back borrowed shares.
• Collateral is security for the short position, not an additional source of profit.
• A price increase raises the repurchase cost and creates a loss on the short.
• The answer states that the account must hold enough to cover the full closeout amount.

Tags

# short selling with collateral accounting


# short selling with collateral accounting












I don't know how the accounting works for short selling with collateral:

For example if a stock is \$10 a share and turn out to be $15 a share a week later.

At time 0, you borrow and sell 10 shares and get total proceeds $100

If collateral requirement is 50%: you have to keep $50 in the bank, and any potential losses are deducted from there first.

A week later, your position is worth 10 * $15 = $150. If you close, you have net loss \$100 + -\$150 = -$50

Basically wipe out your collateral account entirely, \$50-$50=0

So you still take home $50 which you got from the original sale but weren't required to put into the collateral account.

Doesn't this show you still take home positive amount of money, where as if there was no collateral accounting: very clearly you sold for \$100 and bought for $150, so your loss is very clear.

For shorting with collateral it appears you still have $50... very confused.

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/25748

Surely you have to keep $150 in your account against the short sale, all of which you lose on the close out.

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