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Zecco.com » General Investing » New Investors » Shorting Stocks
Last post 04-18-2008, 4:13 PM by tnor64. 6 replies.
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  •  04-17-2008, 3:31 PM 27274

    Shorting Stocks

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    I'm new to trading and wanted to understand why we need to have a margin account to short stocks. Is it because we do not own any and therefore cannot sell ?

    Shorting - Margin account allows us to borrow not only funds, but stocks from brokers to sell on their behalf. Please confirm.

    Also, I have been buying and selling stocks as a day trading and haven't really held for a longer time for fear of loosing value. I'm very keen on shorting and want to know what's the best approach to this.

  •  04-17-2008, 3:55 PM 27275 in reply to 27274

    Re: Shorting Stocks

    Reply Quote

    A margin account is required by FRB Reg T.  One reason, among many, is the fact that the broker can liquidate your account if it goes in the toilet.

    One thing to bear in mind when considering the merits of short sales is the fact that retail short sellers do not receive interest on either the sale proceeds or on their segregated margin balances.  Together this represents 150% of the value of the trade.  That is a big edge to give up, imho.

  •  04-17-2008, 4:25 PM 27279 in reply to 27275

    Re: Shorting Stocks

    Reply Quote
    Even in non-margin accounts, I do not see interest being received on sale proceeds unless its a dividend being paid out by the company. Am I incorrect?

    Yes it definitely has its own risks. I was thinking of creating a separate margin account. This way I can control the amount I want to allocate to the margin account and thus control my losses.

    Any minmum limits on the amount one should hold for a margin account?

  •  04-18-2008, 8:29 AM 27349 in reply to 27279

    Re: Shorting Stocks

    Reply Quote
    Let me rephrase.  Suppose you short 1000 shares of XYZ at $100.  The sale generates $100,000 in proceeds.  Because you are short you must have $50,000 in segregated margin funds in addition to those proceeds to secure the trade.  Now there is $150,000 floating around out there for the duration of the short sale (we'll simplify and assume no price movement in XYZ for the purposes of this example).  You are not getting interest on that 150 grand.  The broker is.  He loves you with all his heart for your unbounded generosity.  Short sales are very profitable for the firm.  Large professional traders get interest on their money.  You compete, one way or the other, with them.

  •  04-18-2008, 9:09 AM 27351 in reply to 27349

    Re: Shorting Stocks

    Reply Quote
    a far easier option would just by a put option, just out of the money. So much easier, less capital intensive etc etc and you still get the same great rewards. Doesn't make any sense to do it any other way. Just for thoughts, if you new to trading don't you think you should "learn to walk  before you run?"

  •  04-18-2008, 3:51 PM 27395 in reply to 27351

    Re: Shorting Stocks

    Reply Quote
    Thanks. True, I forgot that margin trade loan is not for free. Yes, i'm very much at the learning stage. But I believe learning keeps happening at every stage.

    I started 3 months ago with MF investments, probably not the best time to get in, shaved off 10% then. I've been more conservative now but always want to eye on the big gain.

  •  04-18-2008, 4:13 PM 27396 in reply to 27395

    Re: Shorting Stocks

    Reply Quote
    you could always use ETFs for shorting segments of the market, if that interests you. A thread here on zecco has some recommendations for ETFs and addresses some of your concerns: http://www.zecco.com/
    morningstar has a useful ETF screener:
    http://screen.morningstar.com/ETFScreener/Selector.html
    if you search by "morningstar category" = "Bear Market" you will find some options for shorting various sectors.

    As a plus, some of these ETFs actual pay out a dividend and you do not need to keep additional funds aside (not earning interest) as security. Most (if not all) of these funds have some expense ratio > 0, but that does not mean they should just be written off. For a reference on expense ratios, this should get you started:
    http://www.fool.com/school/mutualfunds/costs/ratios.htm
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