Short Sale Question

Discussion in 'Trading' started by chuzek, Aug 27, 2010.

  1. chuzek


    I have a rather elementary question that I am almost embarrassed to ask.

    What is the actual price paid when you short sell a stock?

    Investopedia says that when you short sell a stock ( ) that you are first borrowing it from the brokerage. At what price are you borrowing it at? Is it the ask, bid, or last traded price?

    When you buy to cover to close the transaction, are you purchasing the stock at the ask or bid price?

  2. NoDoji


    You aren't borrowing it at a price, you're borrowing the moment you place an order to sell it. So if you want to sell a stock at a price it hasn't yet reached, your limit order is in place and when someone buys at that price you've sold the borrowed shares.

    If you want to sell right this minute at the whatever the best bid is, you place a market order to sell and at that moment you borrow and sell, all at once.

    When you buy back the shares, same thing. You either place a limit order to buy at a specific price or place a market order to buy at the best offer.

    If there are no shares available to borrow from your broker, you will be informed of that and no transaction will take place.
  3. chuzek


    Say we are talking about a stock with a small spread and you want a quick turnover. In a long position, you are buying at the ask price and selling at the bid price. So are you saying that in a short position, first you sell/borrow at the bid price and buy to cover at the ask price?
  4. Yes. Be aware though that stocks can have other borrowing costs associated with them. First off, you have to pay a cash amount equal to any dividends the stock pays while you hold it. Second, there will be some borrowing fee associated with the stock based on how long you hold it. For easy-to-borrow stocks it will be trivial. For hard to borrow stocks it could be huge. Your broker will have info on that.

    Also, since you receive cash at the time of short sale, you want to have a broker that will pay you interest on that cash while you hold it
  5. d08


    Exactly, it just mirrors the long trade. It's just the buyer and the seller, nothing special.