I think you’re mistaken about that. As an empirical fact, it depends. What you are missing is the mechanism where when you sell a stock short, you don’t get to withdraw the cash (for obvious reasons). The broker keeps it until you cover your short and basically pays you interest on the cash deposit. Right now in most of the first world it’s miniscule because money is very cheap, that that is not the case always or everywhere.
Maybe if you have the right connections, and the broker really trust you. The issue is suppose you short a stock, the price goes up and you can’t cover it. Someone has to assume that risk, and of course will want a risk premium for doing so.
Maybe if you have the right connections, and the broker really trust you.
It doesn’t have anything to do with connections or broker trust. It’s standard operating practice for all broker clients.
The issue is suppose you short a stock, the price goes up and you can’t cover it.
If the price goes sufficiently up, you get a margin call. If you can’t meet it, the broker buys the stock to cover using the money in your account without waiting for your consent. The broker has some risk if the stock gaps (that is, the price moves discontinuously, it jumps directly from, say, $20 to $40), but that’s part of the risk the broker normally takes.
Another thing to watch out for when shorting stocks is dividends. If you are short a stock on the ex dividend date, then you have to pay the dividend on each share that you have shorted. However, as long as you keep margin calls and dividends in mind, short selling is a good technique (and an easy one) to play a stock that you are bearish on.
And, no, you don’t need any special connections, although you typically need to request short-selling privileges on your brokerage account.
Another way to play a stock you are bearish on is buying put options. But put options are a lot harder to use effectively because (among other reasons) they become worthless on the expiration date.
Maybe if you have the right connections, and the broker really trust you. The issue is suppose you short a stock, the price goes up and you can’t cover it. Someone has to assume that risk, and of course will want a risk premium for doing so.
It doesn’t have anything to do with connections or broker trust. It’s standard operating practice for all broker clients.
If the price goes sufficiently up, you get a margin call. If you can’t meet it, the broker buys the stock to cover using the money in your account without waiting for your consent. The broker has some risk if the stock gaps (that is, the price moves discontinuously, it jumps directly from, say, $20 to $40), but that’s part of the risk the broker normally takes.
Another thing to watch out for when shorting stocks is dividends. If you are short a stock on the ex dividend date, then you have to pay the dividend on each share that you have shorted. However, as long as you keep margin calls and dividends in mind, short selling is a good technique (and an easy one) to play a stock that you are bearish on.
And, no, you don’t need any special connections, although you typically need to request short-selling privileges on your brokerage account.
Another way to play a stock you are bearish on is buying put options. But put options are a lot harder to use effectively because (among other reasons) they become worthless on the expiration date.