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Let's say that I have $100 in my account and I want to short sell stock A. Stock A is valued at $100, so therefore I sell one share of stock A.

In order to do this, the account is a margin account. Will I be forced to pay interest on the short of this stock even though I am posting the full collateral of $100 since the cash in my account covers this sale?

Does this change from broker to broker or is this uniform among all online brokers?

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The Reg T initial margin requirement for a short sale is 150%. The first 100% of the it can be satisfied by the proceeds of the short sale, leaving just a 50% actual cash requirement. The maintenance requirement is 125% of the current market value of the short sale. Brokers can require higher amounts of either and they can also have a minimum account size requirement.

You borrow one share of stock A trading at $100 and you sell it. Ignoring commissions, $100 is deposited into your account. You need $50 in cash or marginable securities to support this trade.

Each security has a borrow rate. It can be as low as .25% (AMZN or NFLX) or for something rich, today's borrow rate for the cannabis stock TLRY was 175%. This rate is applied to the price of the underlying not the cash proceeds from the sale (you borrowed the share not the cash). It is an annual rate and you are charged each day that the shares are borrowed. It varies from broker to broker. In some cases, the number of shares available for lending is non-existent and you cannot short.

The proceeds from the short sale will be added to the cash balance of your account and if your broker pays interest on cash balances, you will receive interest on these proceeds.

  • Can you please clarify: if I short TLRY at $100/share today and cover the short position 1 year later at $50/share what would be the cost? I'll need to return 1 TLRY share plus $175, or 1.75 * $50? – Pavel Jan 2 at 1:20
  • Per quid's answer, in a short situation you're borrowing the value of the shares, not cash. Your question cannot be aswered accurately because the borrow rate changes day to day. If the borrow rate were to remain at 175% all year long then your borrow cost for the year would be 1.75 * $10,000 or $17,500 which is more than you could make from the company going bankrupt ! And if the stock paid a dividend and you were short all year long, you'd also be out the dividends. – Bob Baerker Jan 2 at 4:24
  • Why $10,000? I short one TLRY share at $100/share. The borrow rate is per year, right (and might change during the year)? – Pavel Jan 3 at 5:55
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    Sorry, I wasn't paying attention. I did the numbers based on 100 shares. So it's as you said. One share at $100 with a borrow rate of 175% would be $175 a year in borrow fee. – Bob Baerker Jan 3 at 6:18
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In a short situation you're not borrowing the value of the share you're borrowing the share. You borrowed 1 share of XYZ. You did not borrow $100.

Separately there is a margin (collateral) requirement. The margin requirements are different than paying interest on the share you borrowed. Margin requirements exist because the share will fluctuate in value and your broker wants to make sure you're never underwater by more than x%.

There are regulations in place but really the specifics will vary by broker.

  • Does this mean that I have to pay the interest rate on the margin amount to borrow the share? Your answer was very helpful overall in helping me understand this but I don't think it exactly answered my question. Ty. – Michael d Dec 24 '18 at 22:23
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    You pay on the value of the security (see my Answer). – Bob Baerker Dec 24 '18 at 22:31
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Shorting stocks with high borrow rates is generally indicative of a “crowded short”. Try googling “crowded trades” & “crowded shorts”. As far as shorting $100 of TLRY @175% rate, yes you would pay your broker $175 if you held the short for a year. TLRY has floated a relatively low number of shares to the public, thus the wild swings and high borrow rates.

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