What does a short margin account permit a client to do?

What does a short margin account permit a client to do?

• A. Invest only in bonds
• B. Sell securities short by borrowing them
• C. Hold only cash with no securities
• D. Transfer money to other accounts without limitations

Answer: (B)

A short margin account is specifically designed to allow clients to engage in short selling, which involves borrowing securities to sell them on the market with the expectation that the price will decline. The client later repurchases the securities at a lower price to return them to the lender, ideally making a profit from the difference. This type of account permits the use of leverage, enabling clients to take a more aggressive investment stance by selling securities that they do not own.

In contrast to the other options, which do not accurately reflect the nature or capabilities of a short margin account, the ability to sell securities short is intrinsic to its function. An account that allows only investments in bonds would not encompass the concept of short selling; similarly, holding only cash without securities or transferring money without limitations are not activities that characterize the purpose of a short margin account. Thus, the option to sell securities short by borrowing them is correct because it captures the essential feature of what a short margin account is intended for.