How Stockholders Can Help Combat Short Selling. To carry out short sales, traders need to borrow stock from brokers that is registered in "street name", or held in a margin account. However, if enough stock is taken out of street name or margin accounts, short sellers will have difficulty maintaining the current volume of short sales. Therefore, shareholders can do the following:
Promptly call your brokers and have your stock taken out of the street name, or put into a cash account. This only means that instead of your shares being registered in your broker's name or being held in a margin account, they would be registered in your name or placed in a cash account. You would still own the stock, and your ability to hold or sell the stock would not change.
What would change? A short seller would not be able to borrow your stock for short sales without your permission. So long as the stock is registered in the broker's name, the broker is the legal owner of record, and can lend your stock to a short seller without your permission. Similarly, so long as you have your stock in a margin account, it is available for loan by your broker. If you have the stock registered in your own name or placed in a cash account, brokers will not be able to do this.
Would there be any downside for stockholders having shares registered in their own names or held in cash accounts? From an economic point of view, the answer is no -- nothing will have changed. The only difference would be administrative including some possible paperwork and expenses you may incur in re-registering or moving your shares. When you want to sell, you would have to send your broker instructions to move the stock back into street name or into a margin account, and the broker may ask you to sign some transfer documents. We think this is a small price to pay for relieving heavy short selling pressure. When can shares be taken out of street name or a margin account? Anytime you decide to pursue it.
For Dividend Stock:
In order to determine whether your shares have been loaned out for use by short sellers, check the 1099 form sent to you by your broker. There are different sections in this form. If your shares have not been loaned out, then you will see that dividends have been paid and that amount will be noted in the "1099-DIV" section of the form. However, if your shares have been loaned out without your knowledge, then you will see that the dividend income earned is noted in the 1099-MISC section of the form, and you will see a payment called, "Substitute Payments in Lieu of Dividends or Interest." If you are receiving payments in lieu of dividends, these funds are taxed at ordinary income tax rates, not the special, lower tax rate paid on dividend income.
Additionally, if you purchased shares from a person engaged in naked short selling, you have what might be called "phantom shares" — the shares do not exist since the naked short seller sold shares he did not own. In this case, you would also see dividend payments that are reported in the 1099-MISC section of your form. This is because, since the shares do not really exist, the company did not pay a dividend on them. Therefore, the broker owes you the same amount of money in substitution for the dividend. If you have any questions regarding these payments, contact your broker as to the terms of your brokerage agreement. With regard to the tax consequences of these payments, please consult your tax advisor.