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I would like to share with everyone a mistake I have made that has not helped my long term investment in microcap stocks. I have held the stock in a marginable account. I never knew that by signing the margin agreement that my shares could be borrowed and used by another marketmaker to SHORT the stock. Anyone keeping $5.00 and under stock in a marginable account is working against themselves because they are giving market makers the right to short the stock. It makes no sense to keep any stock which has a value of less than $5.00 a share in a marginable account. The brokerage house won't let you borrow on it anyway.
Many account applications don't even ask you if you want a margin account. They just include a marginable account in their application. Example of this can be found when one attempts to start an on line account with Scottsdale Securities as their individual account is entitled: CASH AND MARGIN ACCOUNT - INDIVIDUAL APPLICATION. I was successful in starting a CASH ONLY account by phoning the broker and making out the paperwork for a CASH ONLY ACCOUNT.
Each investor should check their account status to verify if their account is marginable or not. If their account is marginable, they should start another brokerage account which is not marginable and keep their $ 5.00 and under stocks in that account. This action will stop the market makers using your shares to short your stock and will ultimately help the shares of your company to appreciate. If every stockholder were to do this, it would create a short squeeze in your security and help drive the price of your stock up. If you don't take these measures, you are working against yourself and allowing the marketmakers to borrow your shares to short your stock.
The following is taken from AOL's "The On Line Investor" under the subject of "Selling Stock Short":
On the other hand, if the stock is traded on the NASDAQ, no problem. Because there is no central exchange, different market makers will take your short sale on the bid side of the market, as long as they can borrow the stock to accommodate your sell. If the stock gets hit too much, they simply stop trading the stock until buyers return to the stock. The ability to borrow the stock is a big deal in shorting stock, both on the NASDAQ and the exchanges and here's what that means:
Borrowing Stock: When you enter an order to sell a stock short, you must tell the broker you're shorting the stock. The reason? The broker needs to be able to borrow the stock from someone so that it can deliver to the buying party the stock you want to sell. Think about it. You want to sell something to someone who wants to buy it. They want to own the stock. So you have to be able to deliver stock to the buyer. But you don't own the stock. You're shorting it. Where does the stock come from that the buyer gets? It comes from another account that has the stock and has signed a margin agreement with the broker. If an account has a margin agreement, it says, in the fine print, that the broker can borrow stock from the account to use for its own purposes. It's standard practice in the industry. That's why brokers like margin accounts. You should like them, too, because borrowing money in your margin account is probably the cheapest way to borrow money. However, having that margin account allows the broker to use the stocks in your account for its own purpose unless you don't give the broker that right. But most investors do.
So the broker can then go into an account, borrow the shares needed to fill the buy side of the trade (remember: the broker must deliver stock to the buyer of your stock within three business days of your trade). That's why you have to tell the broker you're selling the stock short. If the broker can't borrow the stock because there isn't enough stock around to borrow, then you won't be able to short the stock. Every broker keeps a list of stocks that are not eligible for shorting. Once you try to enter your order to sell short, you'll find out quickly if your stock is on that list. Usually, the smaller cap stocks are the ones that are hardest to short. Difficult for the investor to short but not difficult for the marketmakers to borrow the investor's shares to short themselves.
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