The Price Declines
Let’s examine what happens if there is a decline in the value of shorted stock bought on margin. Remember that a decline in value is good for a short seller.
Example: Candy shorted 1,000 shares of XYZ at $30 per share. Suppose XYZ then fell to $25 per share causing the SMV of Candy’s stock to fall from $30,000 to $25,000 (1000 * $25).
The credit balance stays the same because the proceeds and the deposit are unchanged. Equity on the other hand, increases as the following equation shows:
Credit Balance – SMV = Equity
$45,000 – $25,000 = $20,000
A special memorandu