In a securities transaction, credit balance refers to the money credited to the clients' margin account upon a short sale of securities. Brokerages open margin accounts of clients who execute short sales.
Understanding Credit Balance
Clients executing short sales of securities are also required to maintain a margin with the brokerage. In a short sale, the client sells securities in the market in anticipation of buying them back at a lower price. Money credited to the client's margin account from a short sale also adds to the credit balance.
In the case of a short sale of securities, the proceeds do not belong to the seller since he/she does not own the securities. The sale proceeds are retained in the margin account for the purpose of repurchase of shares from the market and returning the funds or securities borrowed from the broker.
Factors to Consider
Margin accounts consist of funds from short sales and margin money and always show a credit balance.
A margin account is separate from the regular trading account, which is used to buy and sell securities in the stock market.
A margin account also enables a client to borrow securities or money from the broker. Hence, the credit balance can also include funds borrowed from a broker upon execution of a short sale transaction.
A margin account can consist of margin maintained by a client as well as money credited upon a short sale of securities.
A client would need to deposit additional margin in a case where the margin amount falls below the required amount.
Unlike a cash account where an investor can only sell and buy securities with the available cash balance, a margin account allows a trader to borrow money from a broker to buy additional shares or borrow shares to sell. An investor with cash of Rs 10,000 can borrow another Rs 5,000 from his brother and buy shares worth Rs 15,000.