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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.

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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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  • $\begingroup$ i know in practice you have to keep 150% as collateral, but in this hypothetical case, the collateral requirement only requires you to keep 50% of your original proceeds as collateral...So initially you earned \$100 from shorting, and you are required to keep \$50 as collateral. my understanding is that you can do whatever you want with the other $50. $\endgroup$ – MoronicHero May 1 '16 at 16:29
  • $\begingroup$ are you saying that during the middle of the shorting transaction the seller is not allowed to withdraw a portion of the proceeds from the initial sale to use elsewhere? if so then what's the purpose of collateral? $\endgroup$ – MoronicHero May 1 '16 at 16:46
  • $\begingroup$ Margin requirement of 50% refers to 50% the current market value of the shorted securities, not "50% of the original proceeds" as you incorrectly state. $\endgroup$ – Alex C May 1 '16 at 17:20
  • $\begingroup$ ok, so that would be $75...still don't understand the purpose of collateral. $\endgroup$ – MoronicHero May 1 '16 at 17:37
  • $\begingroup$ The purpose of the collateral is to protect the brokerage firm from a rise in price during the next 24 hours. But you are still on the hook for the full amount you borrowed in the long run. $\endgroup$ – Alex C May 1 '16 at 18:32

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