If I go long a stock and have sufficient cash in my account to fully fund the position, my broker charges me nothing because I have purchased and own the shares. But what happens if I short a stock? How much will my broker charge me assuming that there is always enough cash in my account to fully fund the position for as long as I'm short the stock. If there are borrowing costs, how do I determine them? (I use Interactive Brokers in case this question is broker specific.)
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What will my broker charge me to borrow shares for purpose of short selling?
- Thread starter ET180
- Start date
just interest on your profits usually if you're using margin, if you're using cash the broker usually doesn't charge you anything beside the cost of commission
It's probably not free. Look it up:
https://www.interactivebrokers.com/en/software/am/am/ibreference/shortstockavailabilitytool.htm
https://www.interactivebrokers.com/en/software/am/am/ibreference/shortstockavailabilitytool.htm
just interest on your profits usually if you're using margin, if you're using cash the broker usually doesn't charge you anything beside the cost of commission
As far as I know, you can't use a cash account to short stocks.
As far as I know, you can't use a cash account to short stocks.
What I meant is that short with a margin account, but have the position fully funded (not borrowing any money to fund the short). I don't understand why anyone would loan out shares without charging "rent" for them. You can't borrow a stranger's house or condo without paying for it. Why would stocks be any different? And what happens when the person sells the shares that you're borrowing?
Usually the broker charges for lending them, but doesn't share it with the customer. If the lender recalls their shares in order to sell them, your broker has to find another lender or else your short position will be subject to a buy-in.
What I meant is that short with a margin account, but have the position fully funded (not borrowing any money to fund the short). I don't understand why anyone would loan out shares without charging "rent" for them. You can't borrow a stranger's house or condo without paying for it. Why would stocks be any different? And what happens when the person sells the shares that you're borrowing?
You do get charged to borrow stock no matter what amount of money you have in your account. If a person sells the shares that you are borrowing, then your broker has to find other shares to borrow. If they can't locate those shares, then they will be forced to cover your position.
the reason is that short selling the broker is a profit center for a broker. every margin agreement you sign allows the broker to loan out your long stock.You can't borrow a stranger's house or condo without paying for it. Why would stocks be any different?
not true.You do get charged to borrow stock no matter what amount of money you have in your account.
interest on money generated by the short sale is how the broker makes money. most brokers do not share interest earned with retail clients. exception is with hard to borrow stocks where you pay a fee because it is difficult to find stock to short.
there is an old saying on wall street the bulls pay interests on their transactions but the bears don't.
the reason is that short selling the broker is a profit center for a broker. every margin agreement you sign allows the broker to loan out your long stock.
If that's true then why would IB offer the Stock Yield Enhancement Program:
http://ibkb.interactivebrokers.com/node/1838
It might be the case that, as you state, IB already loans customers shares to other customers and charges borrowing fees on other people's assets. In that case, they can always get the shares back. It appears that the intent of the program above is to loan shares out to third parties in which case it may not always be possible to get the shares back. Therefore, they compensate customers a small amount for the risk.
I used the IB short stock availability tool referenced above. I looked at a few large S&P 500 stocks and IB usually charges 0.25% for the fee and then a rebate of something less than 0.25%. In some cases, for more difficult to borrow stocks such as Tesla or ConocoPhilips, the rebate fee is actually negative (which I assume means that it's an additional charge on top of IB's base fee). In any case, at least with IB, it does not appear possible to collect interest by shorting a stock. I was thinking that if the interest charged on a short position was sufficiently small (ideally zero), then I could create a synthetic long then short the stock capture the delta in premium. Ignoring the borrowing costs associated with the short stock, the premium can yield about 2-3% per year. Not a great return, but better than the 0% that I'm currently getting with excess cash as I wait for volatility to pick up.
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