Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Shorting stocks: Broken stocks - Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Carl Yee who wrote (1153)	6/15/1998 1:01:00 PM
From: Daniel Chisholm	Read Replies (1) \| Respond to of 2506

This would depend on your broker. In my case, dealing with Canadian brokerages, I would have to maintain the marked-to market value of the security in the non-interest-bearing "short" part of my account. Additionally, in the "margin" or "cash" portions of my account, I would have to maintain interest-bearing cash deposits (or marginable securities, etc) sufficient to cover the balance of the "short margin requirement". Here is an example, say I shorted 1000 shares of XYZ (everybody's favorite stock... ;-) at $7. Let's say the stock delists and falls to 6 cents per share, and is traded on the OTC-BB or some other "unlisted" market. One Canadian broker's margin requirements for this position is "Unlisted Stocks, Value under $0.50 - 100% of Market plus $0.50 per share" If you are interested in typical Canadian margin requirements, go to investorline.com and successively follow "Site Map," "Products and Services," and finally "Margin Account Operation. This would mean that, at this brokerage, you would have to maintain 6 cents per share ($60) in a non-interest-bearing account, and you would have to also maintain on deposit 50 cents per share ($500) in either your cash or margin account. That $500 would earn one or two percentage points less than a money market fund, typically. Alternatively, instead of keeping $500 of cash on deposit and earning below-market interest rates, you could instead keep $1000 in a money market mutual fund and earn almost-fair rates (since $1000 of a mutual fund is considered to provide 50% "marginable equivalent"). Or you could keep $500/0.95 (0.95 because T-bills have a 5% margin requirement - i.e., they are "95% as good as cash") worth of T-bills and earn exactly market interest rates (of course this wouldn't work in this case since T-bills don't come in such small denominations). The rest of the proceeds of your short sale ($7000 less the $500 you must keep on deposit), plus whatever margin you had to put up in the first place (in order to initiate the trade), are yours free and clear and may be withdrawn. (i.e., you could spend the cash) There, so now that I've described how it works in Canada, would some kind soul describe how it works in the US? All the descriptions I've seen of short sale margining in a U.S. brokerage seemed to be overly complicated (it made me think that they were written by someone who didn't actually understand how things worked). - Daniel