U of Finance

Note: Below in 'Short Selling- Margin Requirement, Margin Calls, and Risks', the regulatory frameworks of the initial deposits into the margin account and the subsequent margin calls and maintenance requirements after the share price moves are explained

Example- First you deposit an initial $1,000 into a margin account at your prime brokerage to borrow 100 shares of Morgan Stanley at a $20. You sell them collecting $2,000, thus having $3,000 in your margin account as assets. However, you still owe 100 shares of Morgan Stanley to the lender.

Scenario 1- In 1 month, Morgan Stanley is now trading at $15. You decide to buy back the 100 shares at $15 for $1,500 from your margin account and in the process, returning the shares to the lender.

Profit= $2,000- $1,500= $500

Scenario 2- In 1 month, Morgan Stanley is now trading at $30. You as the manager don't want to take a loss, thus you as the manager may be subject to a margin call by the prime brokerage.

: Look at the panel "Short Selling- Margin Requirement, Margin Calls and Risks" to understand margin calls the changing margin requirements in the event the price rises or falls

Further explanation

: If the manager deposits more money into the account to serve as collateral, he still has a chance to profit if the stock was to take a nosedive. In essense, the manger is essentially buying time until the stock falls. However, the opposite could occur and losses would be magnified.