Newbie questions about shorting stocks.

Love2Trade$ said:
In addition to the excellent replies you've already received I will add a couple nuances:
  1. Another risk to shorting is delisting (due to bankruptcy, buyouts, etc). This is less talked about & less likely to happen probability-wise, but if it happens to you and you are holding an excessive position size - it can bankrupt your balance. This is b/c you may have to pay interest for months to years on the delisted stock with little to no recourse. As an example, CMTA (Clementia Pharmaceuticals) was bought out by a private equity firm & de-listed on 4/17/19. Attached to that buyout offer was contingent value rights. So once the stock officially de-listed, you'd still be holding the CVR attached to the now de-listed stock. That CVR holds charges a 0.25% daily compounded interest rate for 5 YEARS (until 12/31/19). Imagine if you had a $10,000 position size (still small by many who trade here) and were forced to pay any legally asked interest rate on that position compounded daily for 5 years?
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I have to admit to being somewhat confused by this. I was under the impression that if you had a short position in a company that gets delisted, you don't have to pay back anything.

https://www.investopedia.com/ask/answers/maintain-short-position-delisted-stock/
 
BaconFat said:
I have to admit to being somewhat confused by this. I was under the impression that if you had a short position in a company that gets delisted, you don't have to pay back anything.

https://www.investopedia.com/ask/answers/maintain-short-position-delisted-stock/
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The article you linked worded itself confusingly so I understand your confusion. It's saying that in the case of a de-listing (for the right reason eg - bankruptcy - as @Robert Morse pointed out) the shorter does not "owe anything" = his cost basis = $0, so his avg. price minus $0 = pure profit.

What the article does not mention, is that while that shorter may have made 100% profit on his position, he is still required to pay short interest on that position until the stock is officially de-listed by the DTC corporation - which can take years. If you take a small position size of 100 shares and profit a few hundred bucks, this can still be easily overriden by the daily compounded short interest you have to pay on the entire position size. This logic is magnified if your position size is large. IMO, it's generally not worth the headache of shorting a stock all the way to $0 via de-listing.

Does this make sense now?
 
Which is probably the reason many stocks crashing to $0 get some kind of bump before they get there when they get down to the pennies level - short covering by those closing out.
 
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