A short market value is a term used to identify the total amount of any short sales associated with an investor’s account when the trading day is closed. This type of value is important, owing to the way many brokerages structure margin accounts for their customers. Depending on the total short market value at the end of the day’s trading and the margin requirement that the brokerage has in place on the account, some restrictions may be placed on the investor’s account until those requirements are met.
Key to understanding a short market value is grasping the concept of the short sale. Essentially, a short sale involves borrowing some sort of investment such as a security or a futures contract from the broker and selling it for a period of time. As part of the process, the investor must at some point buy back the asset and return it to the brokerage. The investor benefits by receiving any returns generated between the time the asset is borrowed and sold, and when it is repurchased and returned to the broker. In the best case scenario, the investor borrows and sells the asset just before it increases in value, holds it long enough to enjoy the benefits, then repurchases the price of the asset begins to fall.
In order to prevent an investor from carrying too much debt in terms of those borrowed securities, brokerages will monitor the amount of short sales that are executed on the investor’s account, determining the total of short sales that are in place at the end of the trading day. Since the borrowing is managed using a margin account, the brokerage wants to make sure the total of those short sales do not exceed the limitations placed on that account. If the total is outside the minimum and maximum ranges assigned to the account, the investor will need to take action to restore the balance of the account before being allowed to undertake any additional trades. This action of checking on the current short market value helps to protect the investor from becoming overextended and also keeps the level of risk assumed by the broker within reasonable limits.
Monitoring short market value is a task that occurs each trading day. Thanks to technological innovations, it is possible to quickly determine the amount of short sales currently related to a specific investor account, and to take whatever action may be required. Given the real-time nature of the monitoring, potential issues can quickly be identified, allowing the investor to address and resolve any issues before there is a chance to negatively impact the use of the margin account.
