Margin on short sale

[yickwong]

You decide to sell short 100 shares of C when it is selling at 56. Your broker tells you that your margin requirement is 45% and that the commision on the purchase is 155, while you are short the stock, C pays a 2.50 per share dividend. At the end of one year, you buy 100 shares of C at 45 to close out your position and are charged commission of 145 and 8% on money borrowed.


I don't understand why the interest is based on the value of the initial value (5600), i thought you receive the money from the sale, so why would you need to borrow money initially? Don't you just borrow stocks?

THanks for your help guys.

 

[Niblita75]

The initial margin is how much you initially put up with your own money. So $2,520 is what you put up and the brokerage house finances the other $3080. You are charged the 8% on the amount borrowed ($3080). Of course when calculating total return you must make sure that you do not include dividends (those are given to the actual owners of the shares because again you are borrowing them). I hope this helps.

Edit: I am assuming "margin requirement" in your post is referring to initial margin. There is also a maintenance margin which would be lower (I remember problems having maintenance margins of somewhere between 30-35%). If the shares you sold short rise too far, the amount of equity you initially had shrinks and when the percent of equity you have gets to the maintenance margin you will receive a call and must either liquidate or put up more cash.



Edited 3 time(s). Last edit at Saturday, August 4, 2007 at 11:30PM by Niblita75.

 

[JoeyDVivre]

I'm with yickwong on this. You're not borrowing money from anybody. You may have to pay borrow charges on the stock however.

 

[June07_guy]

yicwong,
Look here, we discussed this before.

http://www.analystforum.com/phorums/read.php?11,519927,521286#msg-521286


Guy