Can someone explain how (i) cash is “raised” from a short sale, and (ii) interest is paid to your broker. My understanding of short sale is: - Enter into short position with broker (no cash is received or paid) - You post collateral to broker in event position moves against you - You will gain interest or return on whatever your collateral is. Then a “naked short sale” would be doing the above with no collateral.
A naked short sale is a short sale where the broker enters the transcation w/o securing the available shares / security to borrow. It’s illegal in the U.S., although speculated to be rampant.
So will interest be charged on the initial value of the underlying? the market value of the underlying? By shorting a stock is this a synthetic capital raising because you are selling shares that you don’t own and only posting a small collateral amount? Just abit confusing because the materials speak of short sales as if you (i) enter into short, and (ii) raise a margin facility from the broker on the notional amount. These are two seperate trades though.
just a clarification, naked short selling per-se isn’t directly illegal in less it is engaged in with the intent to manipulate the market pricing mechanism, or that clear intent to not borrow the security can be proved (which is darn near impossible to do). Further the SEC allows certain market participants to be exempt from Regulation SHO, such as Broker-Dealer to Broker-Dealer transactions and market makers for the majority of individual and institutional investors a broker-dealer won’t enter a short position for the client unless margin or collateral is already available in the account.
Aside from naked shorts - i) by “raising money” on entering the short sale, is CFA cirriculum referring to posting collateral? ii) who pays and receives interest in a short sale and why?
vandyk30 Wrote: ------------------------------------------------------- > Aside from naked shorts - > > i) by “raising money” on entering the short sale, > is CFA cirriculum referring to posting collateral? > You borrow a security and then you sell it immediately. The proceeds from the sales are cash. > > ii) who pays and receives interest in a short sale > and why? You pay a borrowing rate on the loan of the security, but you also can deposit the proceeds into T-bill or whatever and earn a return. That is my understand. I could be way off though.
i) the broker lends you the stock, you sell it in the market and get money for it therefore you raise money ii) you would pay interest to your broker, and receive interest on the cash- because the rate charged by broker is higher you would pay interest to your broker. that is my understanding
mwvt9 draw the gun quicker…