Shorting stocks: Mechanical aspects Message Board

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Strategies & Market Trends : Shorting stocks: Mechanical aspects

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To: Oliver Hellwig who wrote (16)	6/10/1997 5:30:00 PM
From: Q.	of 172

Oliver, the money recd, when the borrowed stock is sold, is deposited by your broker into a sub-account of your brokerage account. It is money that you can't spend, although a few brokerages do pay you a small amount of interest on it. This sub-account doesn't exist in a vacuum, though. Cash moves between it and your margin account daily. When the stock in your short account goes up (down) each day, the broker moves cash from (to) your margin account to keep the cash in the short account exactly equal to the offsetting value of the stock. I may not be using the correct broker's terminology to describe all of this accounting, but the effect is just as I've described it. The broker also requires some additional collateral in your margin account at the time you make the trade, typically $5 per share or 50% of the short balance whichever is greater. In otherwords, you couldn't open an account with zero cash and zero securities and sell a stock short. I assume that these collateral requirements are to protect the broker.

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