Financial Technology & Automated Investing. 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. A debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company's balance sheet. In effect, the funds cannot be withdrawn or used to purchase other assets. Will 5G Impact Our Cell Phone Plans (or Our Health?! Fact Check: What Power Does the President Really Have Over State Governors? Festival of Sacrifice: The Past and Present of the Islamic Holiday of Eid al-Adha. The accounts that have a normal credit balance include contra-asset, liability, gain, revenue, owner's equity and stockholders' equity accounts. Say, an investor shorts 200 Facebook (FB) shares at $180/share for total proceeds of $36,000. The short seller is required to deposit additional margin in the account when the margin falls below the total margin requirement of $18,000. 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. Problem 75MCQ from Chapter 3: Which of the following accounts normally have a credit balan... Get solutions 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. Some brokers stipulate the margin requirement on short sales to be 150% of the value of the short sale. 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. If an investor has $500 in the account, then he can only purchase shares worth $500, inclusive of commission—nothing more, nothing less. A margin account with only short positions will show a credit balance. Furthermore, an expense account may have a credit balance if the company makes a reversing entry to carry it to a new accounting period. When the shares are first sold short, the investor receives the cash amount of the sale in his or her margin account. The credit balance amount includes both the proceeds from the short sale itself and the specified margin amount the customer is required to deposit under "Regulation T.". In contrast, accounts that normally have a debit balance include the asset, loss, contra-liability, owner's drawing, dividend and expense accounts. As expenses are paid, expense accounts get credited. Also, the margin following the price increment now falls below the Reg T 50% requirement since $4,000/$50,000 = 8%. 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 Secret Science of Solving Crossword Puzzles, Racist Phrases to Remove From Your Mental Lexicon. An investor with a $500 cash balance may want to purchase shares worth $800. 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). In this case, his broker can lend him the additional $300 through a margin account. A margin call is when money must be added to a margin account after a trading loss in order to meet minimum capital requirements. Get more help from Chegg. The accounts that have a normal credit balance include contra-asset, liability, gain, revenue, owner's equity and stockholders' equity accounts. The credit balance amount includes both the proceeds from the short sale itself and the specified margin amount the customer is required to deposit under "Regulation T.". 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.

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