Mechanics of Short Selling
I'd like to short a handful of equities in my OptionsHouse portfolio but I have a couple of overall questions about the technical process of short selling
1) I'd like to operate with no margin, that is, I'd like to cover the entire short sale with my cash. Is this possible? I'm a small investor and I'd prefer to not pay margin interest that will wipe out my return
2) I want to short securities instead of buying short ETFs because of tracking error and various other issues. Does this make sense for a small investor or should I simply use these products and avoid the headache of short selling/setting up a margin account?
Thanks.
1) Trading Short requires you to have a margin account. Even if you are doing cash secured short selling (which I don't think is even possible), the regulatatory aspect requires you to have a margin account as securities in Type 3 (Short) are treated differently than securities on cash or margin for settlement and "accounting" purposes. "Accounting" is just a matter of resolving how much capital is on hand in your account. And unlike cash secured options, in which you can put the cash up as collateral in the event of exercise, if all of a sudden the stock has a massive run to the upside, you may not have enough cash secured against the short to cover the sudden increase in stock price.
2) IF you are truly averse to setting up a margin account, then short etfs are your only definative play, and even then, as you said there are issues to it. If you are hell bent on shorting a stock, do it right, not half assed.
The margin interest is often negligible (depends on the terms and how much you're shorting, but is usually very very tolerable). Open the margin account and keep track of what you're being charged as far as margin interest.
Short Selling Explained (For Dummies) (Originally Posted: 08/12/2011)
This is how to explain short selling to someone without the faintest clue of what it is. :) http://www.bbc.co.uk/news/business-14510946
Any chance we can get this guy to explain mezzanine debt? ;)
Very helpful. Thanks!
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