Question

Under the "cheap stock rule," if a customer sells a stock short under $5.00 per share, he or she must put up the greater of 100% or $2.50 margin per share. What is the greater amount if the customer sells 1,000 shares?

1) $2,750
2) $2,500
3) $5,000
4) $2.50

Answer 1

For 1,000 shares sold short under the cheap stock rule, the customer would need to put up a margin of $2,500, as it is the greater amount compared to 100% of the stock's value, which is under $2.50 per share.

Step-by-step explanation:

Under the "cheap stock rule," when selling a stock short that is priced under $5.00 per share, the customer must adhere to margin requirements, which are the greater of 100% of the value of the stock or $2.50 per share. In this scenario, if a customer sells 1,000 shares short, we need to compare 100% of the stock value (which is not given, but implied to be less than $5.00 per share as it's a cheap stock rule) and $2.50 per share. Since 100% of the value is likely to be less than $2.50 per share (as the stock is under $5.00), the required margin would be $2.50 per share. Therefore, for 1,000 shares, the customer would need to put up $2,500.