I've been catching up on some of the great posts on this board and I'm ready to enlarge my "short" universe beyond securities on which I can buy puts. However, one post I read confused me about the mechanics of a short sale and I was hoping one of you veterans could clear it up for me.I will likely trade through an online broker like eSchwab or Fidelity. If I sell a stock short, I assumed this would result in a positive cash inflow to my account which would either earn interest or which I could use to go long on other stocks (assuming I retain appropriate margin for the short position. The message I read (can't remember who posted it) seemed to indicate that several of my assumptions are incorrect. Can somebody set me straight?Also, am I correct that I have to cover any dividends paid while short a stock? Seems to be a good reason to either avoid shorting dividend-paying stocks or be very aware of dividend payment dates?Thanks in advance!
"If I sell a stock short, I assumed this would result in a positive cash inflow to my account which would either earn interest or which I could use to go long on other stocks"There is an inflow but it is added to the "short credit" line item in your account. It is not cash, it's purely an accounting entry. You don't get interest on it nor can you use it to go long. The market value of your short positions is monitored by the broker. If the short goes your way the difference between you short credit balance and the short market value is added to your margin so you can borrow more. If the short (God forbid!) moves against you, the difference is subtracted from your margin. If you are in the imprudent position of maxing out your margin, you'll be called.Just as you only really make any money on a long position when you sell, you only make money on a short when you buy."Also, am I correct that I have to cover any dividends paid while short a stock? "Heck yes, if I lend you my shares for free you better pay me my dividends when they come due. Brings up a point not often considered. You really do borrow the shares for free, so it is in effect an interest free loan. If you were paid interest on the credit balance, it would be too good to be true! (Bill and Hillary, take note!)
Thanks for the very clear explanation ponderosa.kschof
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