Dividends increase your margin requirement on a short sale -- the sale of borrowed securities. The margin, or collateral requirement, for a short sale is equal to the cash value of the borrowed shares plus an additional amount specified by the broker, typically 25 to 50 percent of the borrowed shares' value. You must keep cash or marketable securities on deposit in your brokerage account to cover your margin requirement.
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By lending you shares, the broker assumes the risk you won't be able to replace them later if the stock price goes up instead of down as you'd hoped. Margin collateral serves as a performance bond -- if you fail to replace the shares, the broker uses the collateral to buy them back. Remaining margin is the collateral you maintain in your brokerage account in excess of your minimum margin requirement. To calculate it, subtract your margin requirement from your collateral balance. For example, suppose you want to short 100 shares of Corp. X, currently selling at $20 a share. If your broker requires 150 percent margin, your minimum collateral is 1.5 times $20 times 100 shares, or $3,000. If you currently have $4,000 in cash on deposit in your account, your remaining margin is $1,000.
Effect of Dividends
If Corp X pays a $2 per share dividend, your margin requirement increases by 100 shares times $2, or $200, because you must pay the dividend amount to the owner of the borrowed shares, your lending broker. The margin requirement is therefore $3,000 plus $200, or $3,200, and your remaining margin with dividends is $4,000 minus $3,200 or $800. Your margin requirement and remaining margin varies as the stock price fluctuates.