short selling

That's right.

My grandmother used to tell me this ditty: "He who sells what isn't his'n must buy it back or go to prison."

If you believe a stock will go down in price, you "short" the stock. In your account, you are then negative, say, 100 shares of IBM. You are then liable to pay the buyer any dividends that IBM declares while you are short. At some point in the future, you buy it back at a lower price, and make a profit.

To the buyer, nothing looks any different than buying shares that were not shares from a short sale.

If I were the original owner, shares I held in my margin account can be borrowed for shorting. The only issue is that if I try to sell them, you can't stop my broker from calling in the short shares. Usually, they borrow other shares for you, but some stocks get 'squeezed' and you are stuck covering your short. JOE

Normally, when you do a transaction, you first buy an item, then you sell the item at a later date. If you buy for less than you sold it for, you made a profit.

Short selling is almost the same, just in a different order. You first sell an item, then at a later date, buy it so you can give clear title to the person who you sold it to. If you buy for less than you sold it for, you made a profit.

Short selling works because of three reasons....

1) brokers and market makers have a pool of shares sitting around and available, so they can sell from that pool, and backfill later. 2) you have to pay interest on the deal because the broker or market maker is loaning you those shares that you sold short. 3) that there are other stock speculators out there who are just as sure that it will go up as you are sure it will go down.

The person doing a short sale hopes for the price to go down, and down far enough to cover the costs (brokerage fees and carrying costs). The end buyer's motivation doesn't matter. They may be buying for a resale, they may be buying to hold, or they may be buying to cover their own short.

In general, you have to be an experienced investor before a broker will allow you to do short sales. You may even have to be accredited (rated by the industry) to do it.

-john-

No, you don't.

In all the brokerage accounts I've ever had, the short sale proceeds are frozen and marked-to-market against the margin account. If the shorted stock declines, cash comes out of the frozen proceeds and flows into the margin account. If the shorted stock appreciates, cash comes out of the margin account and flows into the frozen proceeds.

In the first case, you obviously pay no interest. In the second case, you pay no interest unless the flow creates a debit balance in the margin account.

On the flip side, I've never yet had a brokerage account where *I'm* paid interest on the frozen short-sale proceeds, though I've been told such brokerages do exist.

Since when? Every brokerage account I've ever had let me short sell as soon as I sent in a margin agreement. So the gating function is whether or not they let you have a margin account. And they're pretty loose about handing out margin accounts.

I'd be very surprised to find out that was true.

Interactive Brokers pays tiered floating rate interest on short sales based on dollar break points. First $100k of balance gets zero, balance in excess of $100k gets 4.05%, balance in excess of $1 million gets 4.8% and balance in excess of $3 million gets 5.05%. They will also charge a fee for "hard to borrow" stocks.

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