Short market value is the total amount of any short sale associated with an investor’s account when it closes on the trading day. Brokerages monitor short sales to ensure they do not exceed the limitations placed on the account.
A short market value is a term used to identify the total amount of any short sale associated with an investor’s account when it closes on the trading day. This type of value is important because of the way many brokerages structure margin accounts for their clients. Depending on the total short-term market value at the end of the day’s trading and the margin requirement that the brokerage has set on the account, some restrictions may be placed on the investor’s account until those requirements are met.
The key to understanding a short market value is understanding the concept of a short sale. Essentially, a short sale involves borrowing some type of investment, such as a security or futures contract from the broker, and selling it for a period of time. As part of the process, the investor must at some point buy back the asset and return it to the brokerage. The investor benefits by receiving the returns generated between the time the asset is borrowed and sold, and when it is repurchased and returned to the broker. In the best case, the investor borrows and sells the asset just before it rises in value, holds onto it long enough to enjoy the benefits, and then buys back as the asset’s price begins to fall.
In order to prevent an investor from carrying too much debt in terms of those securities lent, brokerage firms will monitor the number of short sales being executed on the investor’s account, determining the total short sales that are in effect at end of trading day. Since the loans are managed using a margin account, the brokerage wants to ensure that the total of those short sales does not exceed the limitations placed on that account. If the total is outside the minimum and maximum ranges assigned to the account, the trader will need to take steps to restore the account balance before additional trades can be made. This action of checking the current market value for the short helps to protect the investor from getting overextended and also keeps the level of risk taken by the broker within reasonable limits.
Monitoring short market value is a task that occurs every trading day. Thanks to technological innovations, it is possible to quickly determine the number of short sales currently associated with a specific investor account, and take any action that is required. Given the real-time nature of monitoring, potential issues can be quickly identified, allowing the trader to address and resolve any issues before there is a chance of negatively impacting the use of the margin account.
Smart Asset.
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