Conflicting stock shorting fees Who's correct

Discussion in 'Stocks' started by asdfghj7, Jul 14, 2008.

  1. ''XYZ is currently at $100 a share. If you have a $100000 account and you sell short 100 shares of XYZ, your account of $100000 is credited with $10000 worth of XYZ. If the short transaction occurs on March 1, 2008 and you get out a month later at $110, then interest charged by the brokerage will be .......... ?????"

    Using the above example to determine interest fees accrued by the brokerage, I've been told by brokers and have read different explanations concerning interest charged when shorting a stock. Maybe each one of these brokerages is right based on how they run their 'own' business. However, I thought short interest rules would be pretty much universal among brokerages. They all told me that I'm responsible for dividends, but all you have to do is get out a day or two before dividend day comes up. I'd also like to know if there is a brokerage best suited for shorting stocks based on their available shares to borrow from, or if any ole brokerage will do, (which I doubt) along with number of stocks that are allowed to be shorted.

    First explanation
    1. The above scenario incurs no additional fees (interest) other
    than roundtrip costs, due to the fact that no margin
    has even been used. The amount you sold short would have to
    reach over $100000 before any margin was even being tapped
    into. Had you sold short $150000 worth of XYZ, then interest
    would begin to accrue daily on the extra $50000 you
    borrowed on op of the $100000 you already had. (You would
    be responsible for dividends, however.

    2. The above scenario requires you to pay interest on the
    $10000 since this is what you borrowed. As the stock price
    goes up and down everyday, so does your amount to be
    charged interest on goes up and down.

    3. If you have a $100000 margin account at a 3 to 1 ratio, you
    could hypothetically short $250000 worth of XYZ and not pay
    any interests assuming price doesn't get above $300000

    Are any of these correct?
  2. When you sell a stock short your account is credited with cash, so you are not borrowing any money. The assets in your account (cash and/or stocks) are the margin that backs your short sale. As long as your account balance is above zero you will pay zero interest on a short sale. If your account becomes a debit, you then owe the debit plus interest on the debit.

    The exception here is for hard to borrow stock. If you short a hard to borrow stock there is a variable daily fee paid to the owner of the stock for the privilege of borrowing it. This fee is not an interest charge.

    If you use a broker like IB and your short sale balance is high enough you will be paid interest on the cash from the short sale. IB currently pays 0.76% on the amount of short sales over $100K and 1.51% on the amount over $1 million.
  3. jeb9999 is correct. Just to elaborate a bit:

    When you short $10,000 worth of XYZ, your account is <i>credited</i> with $10,000 worth of cash known as "proceeds from short sale." You have <i>borrowed</i> the 100 shares of XYZ which shows up as a negative number of shares in your account.

    It is critical to understand the difference between free cash balance and proceeds from short sale. They both appear as positive numbers, they are both cash, but they are held in different sub-accounts and earn different interest rates.

    All brokers calculate interest in more or less the same way, the only difference is the applicable rates and tiers. There are a few different rates you need to know: interest paid on cash balance, interest paid on short proceeds, and interest charged on cash borrowing (margin rates). Most web based retail brokers do not pay interest on short proceeds (i.e. the rate is 0%). Direct access brokers may pay interest on short proceeds but it won't be very generous. For example IB only pays interest on short balances over $100,000.

    In your example, you are earning cash interest on $100,000, and short proceeds interest (probably 0%) on $10,000. You are not paying interest for anything because you are not borrowing any money.

    Say you then purchase 1000 shares of ABC at $110/share, for a total of $110,000. You now have a cash balance of $-10,000, and you will pay margin interest on that borrowing. You also still have short proceeds of $10,000, and you may get a token amount of interest paid on that balance.

  4. Thank you both. It's incredibly helpful. Joshua
  5. I find your comments usefull for myself, thank you
  6. Who pays a better rate of interest for short sales proceeds than IB ??
  7. I will pick some ideas as well :D