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I understand the concept of being short, but I don't understand how it works, maybe is easy to explain with an example:

1) A has $1 in his account.
2) B has $1 in his account.
3) A wants to buy 100 shares of X at $1
4) B wants to short 100 shares of X at $1

From 3) The broker will give to A $99, A has $100 now and will use that to buy 100 shares. At some point A will need to return the $99 to the broker. If X goes down to $99, then A is forced to sell the 100 shares for $99 and giving those $99 to the broker.

But what happens in 4)?
The broker is giving to B 99 shares of X and he is selling them on the market? so B has now $100 in cash, but he needs to buy 99 shares again at some point to give them back to the broker?

  • From 3) The broker will give to A $99 That doesn't happen. A wouldn't know whether the person he's buying from is selling short or offloading a long position. A is just buying 100 shares, C lent his shares to B. B pays interest against the shares. C probably has no idea his shares were used to lend to B, the broker does that behind the scenes. – quid Jun 21 at 0:09
  • @quid that's too complex for me for a comment, maybe you can write an answer with full example. Who is C? you are saying when I buy shares the broker could then use my shares to lend them to B for example so B can short X? And how can A get 100 shares if the broker is not giving him $99? – Enrique Jun 21 at 1:28
  • @Enrique "you are saying when I buy shares the broker could then use my shares to lend them..." That can happen, yes (whether it happens by default, or you "opt-in" may vary by country and/or broker). I believe you would normally get part of the fee the broker charge the borrower; there are some other wrinkles. See this article – TripeHound Jun 21 at 8:36
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Your question is based on a lack of understanding of margin (I'm assuming that you're talking about the U.S.). Let's start with the margin requirement.

If you want to buy shares on margin, under Reg T, the FRB requires 50% of the value of the purchase (brokers can require more). So if you want to buy 100 shares of a $10 stock on full margin then the margin requirement would be $500 and the remaining $500 would be borrowed from the broker at their prevailing margin interest rate.

Under Reg T, the FRB requires 150% of the value of the short sale at the time of sale (brokers can require more) which is the full value of the short sale proceeds plus an additional margin requirement of 50%. So if you want to sell 100 shares of a $10 stock short, the initial margin requirement is $1,500. Effectively, you are posting $500 of collateral.

There is also a minimum margin maintenance requirement for long and short margin positions but let's omit that discussion since it's not germane to your question.

(A) wants to buy the 100 shares at $10. He either uses $1,000 of his cash to buy the shares (fully paid) or he posts $500 margin to buy on 50% margin.

(B) wants to short the shares. If the shares are borrowable, (A)'s broker lends them to (B)'s broker who makes them available for (B) to sell, which he does and $1,000 goes into (B)'s account (slippage and commissions ignored). (B) pays the prevailing borrow rate on the borrowed shares. It accrues daily. The bulk of it goes to (A)'s broker though (B)'s broker may get a piece of the action. (A)'s broker may or may not credit part of the borrow rate to (A).

What happens to (A) and (B) after this depends on the price of the shares and the share availability.

When (A) wants to sell the stock, he does and he repays the borrowed money to his broker (if any). However, (A) only had a book entry in his account for ownership since the actual shares were given to (B) to short sell which he did to (C) who now possesses them.

(B)'s broker must find other replacement shares to borrow either from other in-house accounts or from another broker. If he can't find them, (B) gets a forced buy in notice and must buy the shares on the open market to replace the shares that he borrowed from (A) which were just sold by (A).

Lastly, if (B) is short the shares on an ex-dividend date, he pays the dividend to (A) because (C) owns the actual shares and will receive the dividend.

  • that's a nice explanation Bob thanks! but in CFD, Forex and Crypto you can have much more power than 2X, 100X or more ir not weird, maybe is not "margin", not sure how to call it, is just leverage? – Enrique Jun 21 at 3:30
  • You're welcome Enrique. My answer was based on your question that asked about buying and selling 'shares' along with the tag 'shorting-securities'. If you want information about the margin involved with CFD, Foex and Crypto then I suggest that you post another question specific to them. – Bob Baerker Jun 21 at 11:09
  • You are right, I will do that, will be nice to compare both cases anyway – Enrique Jun 21 at 11:27

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