Here is How to Calculate Margin When Trade in Stocks and Futures

In a long transaction, you borrow money to buy securities, which you are obligated to pay back. Similarly, in a short sale, you sell securities short by borrowing the securities from a broker, then selling them, with the proceeds deposited in your account. But eventually you’ll have to buy the securities back to return them to the lending broker, which is why the market value of the shorted securities is considered to be a debit to your account.

Equity is equal to the total value of cash and securities if all open positions are closed and all financial obligations are satisfied. So if you deposit $5,000 in an account, and borrow $5,000 to buy $10,000 worth of stock, then your equity is initially $5,000 minus transaction costs. Accruing margin interest will also decrease your equity. If the value of the stock declines to $8,000, then your equity is reduced to $3,000 minus costs, because now the stock is worth $8,000, but you are still obligated to pay your broker $5,000 plus interest for the loan, which is your debit balance. Hence, when using margin to borrow money to enter into a long position by buying stocks:

Equity = Account Value – Debit Balance

Long Margin  =

Equity ───────────── Value of Securities

When margin is used as a performance bond to short securities, then equity equals the amount on deposit minus the value of the shorted securities.

So if you sold short $10,000 worth of stock instead of buying stock with your deposit, then your equity will equal the $15,000 on deposit ($5,000 deposit + $10,000 from short sale) minus the value of the shorted security, which is initially the $10,000 that you sold it for. If the value of the stock rises to $12,000, then your equity is reduced by $2,000, because you’re obligated to buy the stock back, so if you closed your position right now, you would pay $12,000 to buy the stock back and have $3,000 left in your account (minus transaction costs and dividend payouts). Since shorted securities have to be bought back, the debit balance is equal to the current market value of the shorted securities.

Equity = Account Value – Value of Shorted Securities

Note that the account value will be decreased by transaction costs and by any dividends that have to be paid out while the stock is borrowed.

Example — Calculating the Equity of a Short Account

If you deposit $5,000 and sell 1,000 shares of XYZ stock short for $10 per share, then there is $15,000 on deposit in your account, but your equity is still $15,000 - $10,000 = $5,000, which is, of course, what you initially deposited.

If XYZ price rises to $12 per share, then your equity = $15,000 - $12,000 = $3,000.

If XYZ price drops to $8 per share, then your equity = $15,000 - $8,000 = $7,000.

Short Margin  =

Equity ──────────────────── Value of Shorted Securities

So the only difference in calculating the margin for a purchase and for a short sale is that the equity for a purchase is the account value minus the debit balance whereas for a short sale, the equity is the account value minus the value of the shorted securities. Both the debit balance and the value of the shorted securities are obligations that you eventually have to pay.

Example—Calculating the current margin and current equity of a short sale.

You open a margin account and deposit $5,000. You sell short 1,000 shares XYZ stock for $10 per share. The proceeds of the sale, $10,000, is deposited in your account for a total account value of $15,000.


Scenario 1 — The stock price declines to $6 per share, so the 1,000 shares that you sold short is currently worth $6,000. Thus:

• your equity = $15,000 - $6,000 = $9,000
• your margin = $9,000/$6,000 = 1.5 = 150%

Thus, this short sale would be profitable if you bought back the shares now to cover your short, for a net profit of $4,000 minus brokerage commissions and any dividends that had to be paid while the stock was borrowed.


Scenario 2 — The stock price rises to $12.00 per share, which means it will cost you $12,000 to buy back the shares now.

• your equity = $15,000 - $12,000 = $3,000
• your margin = $3,000/$12,000 = .25 = 25%

Because your current margin is now less than 30%, you will be subjected to a margin call. If you decide to buy back the shares now to cover your short, your net loss will be $2,000 plus brokerage commissions and any dividends that had to be paid while the stock was borrowed.

Remember that the above formulas and calculations have been simplified by excluding transaction costs, margin interest, and any dividends that have to be paid for shorted stock. These excluded factors reduce the equity in your account.