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  • reits_r_us reits_r_us Nov 21, 2012 3:48 AM Flag

    Lesson for yourbestfrend on short selling at Fidelity

    RayB,

    You are confusing the term "margin". You have to have a margin account to short, and margin money is charged interest, when you do not have the cash to equal the amount of your borrowing or shorting(exception is day trading account when shorts are covered before closing of the same day...these are not charged interest).

    A lot of folks get confused on this point. Shorting has to be done with "margin dollars" but, as Eagle said, he secures his short shares making sure he has cash to cover their sale(borrowing/purchasing by his broker), and does not pay interest on this "margin". IOW, he does not have to pay interest on the short shares( his broker obtains) if he has the cash, in his account, equal to the short share's value.

    Where Eagle errs, IMO, is saying that you can obtain 1 and 1/2 times the number of shares, to short, as he has cash, and not pay interest. He therefore is shorting(selling to his broker) money, he does not have, for 50% of his short position. On that 50% he must pay interest, because he is taking a loan out from his brokerage, and therefore owes margin interest on that portion of the short shares which are not cash secured. My thought is that Eagle had more cash than he thought and therefore did not borrow and therefore did not suffer an interest charge.

    And so Fidelity is correct when they say you will have to pay interest(from your post):

    ""Your brokerage firm finds a lender. You’ll have to pay interest on the stock loan, similar to a cash loan."""

    Unfortunately, Fidelity doesn't get the grass down to where the cows can eat it. Obviously if it is a "cash" loan you don't have any cash at that point, and "That" is the portion of the loan you pay interest upon. Fidelity could have just stated as much and, hence, avoided much confusion on this point.

    From e-trade(How easy of an explanation is this):

    """Understand how margin works for short positions

    Whenever you make a short sale, you have to have enough funds (cash and/or purchasing power) to be able to buy the shares back at any time, no matter what the stock price is.

    If you sell shares short, and they move against you (rise in price), you'll see funds moved from the cash and sweep section of your account into margin. Your margin balance will show an amount equal to what you'd need to have in order to buy back the shares.

    If short shares continue to rise in price, and you don't have enough cash or sweep balance in your account to cover the position (buy back the shares), you'll begin to borrow on margin for this purpose. At that time, you'll also begin to accrue margin interest charges. These will be computed and charged the same as for a regular margin debit."""

    Does this help??

    DocReits

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    • The only time they have told me I would pay interest for the actual borrowing of the shares is when I called in and in all cases they had to go external to the company to get them as they didn't have them at Fidelity. They were clear about this and since my accounts have been mostly cash for a long time and they can see that I have cash in the account as it it right on their screen as they talk to me I don't see why they would confuse that I was shorting on margin. The fact that it is a margin account only indicates the types of trades you can do. I did not confuse that. You need a margin account to do a lot of things. For one, you cannot sell shares after you have bought them until they clear which is about 3 days later unless you have a margin account because you don't physically own them yet just like you are selling shares you don't own when you short. I believe the only reason you need a margin account to do this so the mechinism for borrowing is set up so it happens automatically. I think that has always been the case. Even back in the early 1900s.

      Anyway, it could be that you don't pay interest if Fidelity does not have to borrow the shares and Fidelity is acting like they are borrowing them even if they are not and keeping the difference. But every time I short I always have to call in to ask them to borrow the shares and I don't know if that is because the stocks I want to short are popular to short or because Fidelity is cheating investors. But I'm interested to find out because I find it a little disconcerting that others are not having this issue.

      Sometimes when I can't find shares to short at Fidelity I can't find them on my TDAmeritrade account either but I transfered most of the cash out of that account when I paid off my house so it doesn't have enough in it to do serious trades so I only use it to chech situations like this. So far they are consistent. However, I never checked on the interest issue at TD.

    • RayB,

      You are confusing the term "margin". You have to have a margin account to short, and margin money is charged interest, when you do not have the cash to equal the amount of your borrowing or shorting(exception is day trading account when shorts are covered before closing of the same day...these are not charged interest).

      A lot of folks get confused on this point. Shorting has to be done with "margin dollars" but, as Eagle said, he secures his short shares making sure he has cash to cover their sale(borrowing/purchasing by his broker), and does not pay interest on this "margin". IOW, he does not have to pay interest on the short shares( his broker obtains) if he has the cash, in his account, equal to the short share's value.

      Where Eagle errs, IMO, is saying that you can obtain 1 and 1/2 times the number of shares, to short, as he has cash, and not pay interest. He therefore is shorting(selling to his broker) money, he does not have, for 50% of his short position. On that 50% he must pay interest, because he is taking a loan out from his brokerage, and therefore owes margin interest on that portion of the short shares which are not cash secured. My thought is that Eagle had more cash than he thought and therefore did not borrow and therefore did not suffer an interest charge.

      And so Fidelity is correct when they say you will have to pay interest(from your post):

      ""Your brokerage firm finds a lender. You’ll have to pay interest on the stock loan, similar to a cash loan."""

      Unfortunately, Fidelity doesn't get the grass down to where the cows can eat it. Obviously if it is a "cash" loan you don't have any cash at that point, and "That" is the portion of the loan you pay interest upon. Fidelity could have just stated as much and, hence, avoided much confusion on this point.

      From e-trade(How easy of an explanation is this):

      """Understand how margin works for short positions

      Whenever you make a short sale, you have to have enough funds (cash and/or purchasing power) to be able to buy the shares back at any time, no matter what the stock price is.

      If you sell shares short, and they move against you (rise in price), you'll see funds moved from the cash and sweep section of your account into margin. Your margin balance will show an amount equal to what you'd need to have in order to buy back the shares.

      If short shares continue to rise in price, and you don't have enough cash or sweep balance in your account to cover the position (buy back the shares), you'll begin to borrow on margin for this purpose. At that time, you'll also begin to accrue margin interest charges. These will be computed and charged the same as for a regular margin debit."""

      Does this help??

    • Addendum:

      ""1 and 1/2 times the number of shares""

      Should read 2x the number....

      Eagle, I might have misunderstood you regarding this point, and I apologize in advance if I did...

      Docreits

      • 1 Reply to reits_r_us
      • No problem. I guess I should have utilized an example. What makes the explanation more complicated is recognizing that the margin requirements depend on the share price of the stock you are shorting. Let me use Scottrade as an example. Their margin (maintenance) requirements are as follows:

        Share Price and Minimum Maintenance

        $12.50 and up...40%

        $5.00 - $12.49...$5 per share

        $.01 - $4.99...$2.50 per share

        Let's say I short 1000 shares of AGNC at 30.00. I receive 30,000 dollars minus the 7 dollar transaction commission. From the requirements above I need to separately hold 40% in cash (12,000 dollars) to avoid borrowing against that short. If the share price rises above 30 to say 31 and I have no more than the 12,000 allocated to maintenance, THEN it enters a borrowing. As such:

        40% of 31,000 is 12,400 dollars. Now I would be borrowing the 400 dollars and paying interest on it. I said to look at shorting costing half as much as buying the shares. That would translate to retaining a 50% maintenance amount or 15,000 dollars in relation to the example. This offers me a hedge if the share price rises after I execute the short and keeps me out of a borrowing situation.

        I HATE paying interest and in all the years I've had credit cards I have never paid one cent in interest on them either! :o)

        Fidelity........ sorry, but they suck IMHO. I don't like them because they are a market maker. Enter an order and you have a better chance of seeing your order filled, BUT they will also piggyback your order and use it to benefit themselves. You can't profit until they get theirs first, a transaction fee is not good enough for them.... I learned this from being a long time past client of theirs.

 
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