Definition: While maintaining a margin account, the amount of funds which are deposited in the customer’s account after a successful execution of a short sale order is called as credit balance.
The credit balance amount includes both the money earned through the short sale itself and the specified margin amount which the customer is obliged to deposit under Regulation T.
In a short sale transaction, an investor basically borrows equity shares from his or her brokerage and then sells the shares on the open market, expecting to buy them back off the open market for a lesser price at a later date and then return them to the brokerage, thereby making a profit from the excess cash left.
When shares are short sold initially, the investor will get the cash amount of the sale in his or her margin account. This amount, in addition to the specified margin amount must be deposited by the investor under Reg T, is referred to as the credit balance.
This balance must be maintained in the investor’s margin account as a form of guarantee that the shares can be bought back from the market and returned to the brokerage house.