What type of trading does a short margin account support?

What type of trading does a short margin account support?

• A. The purchase of bonds only
• B. Short selling of securities
• C. Only cash transactions without leverage
• D. Only buying on margin

Answer: (B)

A short margin account is specifically designed to facilitate short selling of securities. In this type of trading activity, an investor borrows shares from a brokerage with the expectation that the price of those shares will decline. The investor sells the borrowed shares in the market and, if successful, intends to buy them back later at a lower price to return them to the lender. This form of trading allows investors to profit from a decline in the price of a security, which is the fundamental principle behind short selling.

Short margin accounts provide the necessary framework for this type of trading by enabling the borrowing of shares and leveraging the account. They are distinct from long margin accounts, which support buying securities with borrowed funds or leveraging an existing investment. Understanding this distinction is crucial for effective trading strategies as well as compliance with regulations governing such transactions.