Which of the following is a requirement for executing short sales?

Which of the following is a requirement for executing short sales?

• A. It can be executed in a cash account
• B. It must be executed in a margin account
• C. Investors must always deposit the entire sale price
• D. Investors can use their own funds

Answer: (B)

Executing short sales requires that they be done in a margin account because this account type supports borrowing securities to sell them short. When an investor executes a short sale, they are essentially borrowing shares from another party and selling them with the intention of buying them back later, ideally at a lower price. Margin accounts are specifically designed to facilitate such transactions by allowing investors to use borrowed funds to trade. A cash account does not allow for borrowing, which is crucial for short sales since the seller does not initially own the shares that are being sold. Additionally, the entire sale price does not need to be deposited upfront in the way a cash account would require for a purchase transaction. Instead, margin accounts only need a percentage of the total transaction value as collateral. Lastly, while investors can use their own funds within a margin account, this option is not exclusive to short sales and doesn’t fulfill the requirement for executing them.

Executing short sales requires that they be done in a margin account because this account type supports borrowing securities to sell them short. When an investor executes a short sale, they are essentially borrowing shares from another party and selling them with the intention of buying them back later, ideally at a lower price. Margin accounts are specifically designed to facilitate such transactions by allowing investors to use borrowed funds to trade.

A cash account does not allow for borrowing, which is crucial for short sales since the seller does not initially own the shares that are being sold. Additionally, the entire sale price does not need to be deposited upfront in the way a cash account would require for a purchase transaction. Instead, margin accounts only need a percentage of the total transaction value as collateral. Lastly, while investors can use their own funds within a margin account, this option is not exclusive to short sales and doesn’t fulfill the requirement for executing them.