Actually, when you short a stock, you must pay an interest rate to the person from whom you borrowed the stock. That interest rate varies from stock to stock, but is always above the risk-free rate. Thus, if you short a stock and do nothing interesting with the cash and eventually cover it at the original price, you will lose money.
If you enter into a short sale at time 0 and cover at time T, you get paid interest on your collateral or margin requirement by the lender of the asset. This is called the short rebate or (in the bond market) the repo rate. As the short seller, you’ll be required to pay the time T asset price along with lease rate, which is based on the dividends or bond coupons the asset pays out from 0 to T.
So, if no dividends/coupons are paid out, it’s theoretically possible for you to profit from selling short despite no change in the underlying asset price.
The lease rate is an interest rate (ie, based on time) in addition to the absolute minimum payment of the dividends issued. It is set by the market: there is a limited supply of shares available to be borrowed for shorting. For most stocks it is about 0.3% for institutional investors, but 5% for a tenth of stocks. The point is that this is an asymmetry with buying a stock.
Now that I look it up and see that it is 0.3%, I admit that is not so big, but I think it is larger than the repo rate. I see no reason for the lease rate to be related to inflation, so in a high inflation environment, you could make money by shorting a stock that did not change nominal price.
(Dividends are not a big deal in shorting because the price of a stock usually drops by the amount of the dividend, for obvious reasons.)
Actually, when you short a stock, you must pay an interest rate to the person from whom you borrowed the stock. That interest rate varies from stock to stock, but is always above the risk-free rate. Thus, if you short a stock and do nothing interesting with the cash and eventually cover it at the original price, you will lose money.
If you enter into a short sale at time 0 and cover at time T, you get paid interest on your collateral or margin requirement by the lender of the asset. This is called the short rebate or (in the bond market) the repo rate. As the short seller, you’ll be required to pay the time T asset price along with lease rate, which is based on the dividends or bond coupons the asset pays out from 0 to T.
So, if no dividends/coupons are paid out, it’s theoretically possible for you to profit from selling short despite no change in the underlying asset price.
The lease rate is an interest rate (ie, based on time) in addition to the absolute minimum payment of the dividends issued. It is set by the market: there is a limited supply of shares available to be borrowed for shorting. For most stocks it is about 0.3% for institutional investors, but 5% for a tenth of stocks. The point is that this is an asymmetry with buying a stock.
Now that I look it up and see that it is 0.3%, I admit that is not so big, but I think it is larger than the repo rate. I see no reason for the lease rate to be related to inflation, so in a high inflation environment, you could make money by shorting a stock that did not change nominal price.
(Dividends are not a big deal in shorting because the price of a stock usually drops by the amount of the dividend, for obvious reasons.)