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Sprint Corporation Message Board

  • birdman9999997 birdman9999997 Aug 17, 2012 10:46 AM Flag

    Question about Shorting

    Not that I am shorting Sprint; just curious of something I saw on Scottrade. They dont let you short stocks under $ 5. Is that just Scottrade or a rule in general? If so how do they always say the shorts are driving something down?

    Sentiment: Hold

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    • Thumbs down and you didn't even get an answer? Man the signal-noise ratio on these boards is terrible. Let me try to be constructive.

      To answer your last question first, people talk about shorts all the time because it's more cathartic to blame opposing enemies than to accept that someone who actually owned the shares decided to sell or that the underlying company actually has issues. So most talk about how "the shorts are doing X", especially around here, is nonsense.

      That aside, always remember that when you short a stock:
      A) It's your broker's responsibility to go find some to borrow.
      B) The potential loss may be infinite
      This makes them very much unlike a simple buy, where they just flash your offer until takers show up and you can't lose more than the cash spent.

      Either of those may be an issue with a low-dollar stock that's enough to make Scottrade not interested. If the trades are frequent and ownership short, it may be they'd have to keep re-borrowing to keep your short alive. Or maybe the stock falls below $2 and gets de-listed, and now they're keeping track of borrowed OTC.

      But more likely it's the second issue. Since low-dollar stocks are more volatile than most, Scottrade is afraid you'll spend all your cash shorting something at $1, it jumps to $4, and now your whole account is deep underwater. Since a guy with $10k can't cover a $40k loss, you're burned and set to debt collection, and they're out $30k. They don't want that risk for themselves.

      But that's the broker's call. Scottrade sets a hard limit at $5. TDAmeritrade I don't believe has a clear rule, but they will sometimes just say "no" to a request, or at least make you call to place it. I've heard of brokers who will do it but require extra margin lockup. Interactive Brokers is pretty willing, I understand, but even they can't always find the shares to borrow.

      And of course, if you are your own broker, own a seat on the exchange, or are some other high power deep-pocket player then you can short whatever you can borrow. There's no ultimate rule against it, as long as you can handle the potential margin calls.

      Hope that helps.

    • really - someone gave this a thumbdown? It was a question not a statement. I guess you didnt know but decided to vote it a thumb down?

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