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American Capital Agency Corp. Message Board

  • raybans2 raybans2 Nov 20, 2012 11:03 AM Flag

    Lesson for yourbestfrend on short selling at Fidelity

    This is pasted from the Fidelity web page from their "How to short a stock" tutorial. I initially learned about this when I called Fidelity, which is most of the time I want to short, because I get the "shares not available" message and then they volunteer to go find the shares at another broker as I wait and then they always repeat the disclaimer to me about the interest charges after answering my question that I won't be charge for them having to find the shares.

    From Fidelity:

    The process for selling short is relatively simple:

    You place a short-sale order. This is typically done through a margin account that you establish with your brokerage firm.

    Your brokerage firm finds a lender. You’ll have to pay interest on the stock loan, similar to a cash loan. If the stock is readily available (or liquid) you generally pay only the standard interest rate stipulated by your margin account. However, if the stock is classified as “hard to get”—meaning there is greater borrowing demand than supply can meet— the lender may charge you an additional financing fee and that fee can change based on market conditions after you open the position.

    You promise to “close the short.” In essence, you agree to return the shares plus margin interest, financing fees, and dividends or payouts to the lender at any time of your choosing.

    end of paste.

    So what broker do you use? Am I being ripped off?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • 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

      • 3 Replies to reits_r_us
      • 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

      • 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??

    • That's why I don't short shares and buy puts instead.

      I got weekly interest charges when I did my first and only short.

      • 1 Reply to olee2116
      • I have shorted millions of dollars worth of stocks over time and have never paid a single penny in interest. To short stocks and not pay interest, look at shorting as costing half as much as if you were buying the stock instead. Keep enough cash to cover the margin requirement and there are NO charges except the standard transaction commission. The cash you get for selling the borrowed shares does NOT apply to the margin requirement and you are under NO expiration deadlines.

 
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