Short Selling Comment/Question

[ownyourfuture]

I don't have a margin account, so I couldn't short stocks even if I wanted to.
Suppose I could buy put options if I really believed a company was in trouble.

I have nothing against shorting stocks. If someone wants to take a chance, who am I to say they can or can't.

But I also never liked the idea that someone could 'borrow' my shares, even if it's only for a very short period.

Up until the other day, I thought the only way to prevent this was to hold the actual stock certificates.

Then I came across this Q&A somewhere on the web:

Q.: What can you do to prevent your shares holdings from being shorted?
A: Now what can the average personal investor do to stop their own shares being shorted, as believe me your own broker, if approached, WILL sell your own shares that they hold on your behalf as a nominee account.

There are two things you can do, the first is to certificate them but this is not obviously to everyone’s advantage but the alternative solution is simple.

All you do is to phone your broker and put an order in saying that you wish to place your shares for sale at, for arguments sake, double today’s price.

As they are 'on order' they cannot be lent out by your broker and in turn you are reducing the amount of 'free shares' out there that can be used for shorting purposes. And don't forget to move your limit order up when the price starts to recover, then, that way your shares can't be shorted - not much but helps.


I tried to include a poll, but failed.

Do you

1 Certificate your shares.
2 Use the 2nd option & put in an astronomically high sell order.
3 Just let the brokerage hold them.

I'm a number 3, but considering 2

 

[ERD50]

Is there any downside to you (or me) to the broker borrowing your (or my) shares?

If not, why take any action at all.? You said you don't like the idea - but why?

I've never really thought about this, as I can't see how it would affect me.

-ERD50

 

[meierlde]

Actually I understand that the broker can lend shares only from a margin account. If you have a cash account, then your shares can't be lent out. Note that also payments in lieu of dividends for lent stocks are taxable at the full rate and do not get the .15% rate.

 

[MRG]

Is there any downside to you (or me) to the broker borrowing your (or my) shares?

If not, why take any action at all.? You said you don't like the idea - but why?

I've never really thought about this, as I can't see how it would affect me.

-ERD50

+1

I don't want certs!
I don't want to adjust limit orders.
I don't know why I should care?

Sent from my SAMSUNG-SM-G920A using Early Retirement Forum mobile app

 

[Sunset]

If you really believed a company was in trouble, you could sell all your shares in that company, and buy it's competitors or wait for the price to drop a lot and buy back in, or simply forget about that company as an investment.

 

[Zathras]

My understanding is a Broker can't loan out your shares without permission.
If you are buying share with borrowed money (on margin) the rules may be different.

When the shares are out on loan, you loose voting rights.
In the case of Schwab, you can sell the shares at any time (which immediately ends the loan) or call back the shares in three business days by notifying Schwab.

Personally, I love the fact that I earn interest on the value of the shares Schwab 'borrows' from me

 

[Sunset]

...

Personally, I love the fact that I earn interest on the value of the shares Schwab 'borrows' from me

But is it true that you don't get the stock dividends and the interest is not taxed favorably ?

 

[Zathras]

But is it true that you don't get the stock dividends and the interest is not taxed favorably ?

I don't know about all brokers.
With Schwab the dividends go straight to Schwab.
Schwab then passes that on to me PLUS a fee to make up the difference between the qualified dividend rate (if the stock is a qualified dividend) and the higher, regular income tax rate.

They also place the stock on loan in a separate account as well as cash in the amount of the value of the stock. Basically, it is collateral on the stock loan.

The only downside I see is that you loose voting rights.
In the case of TSLA stock, I am making more in interest than I ever would expect to in a qualified dividend stock.
Of course, that interest will fluctuate as demand from the short sellers changes. I've only been doing this a couple of weeks, but so far no fluctuations.

 

[ownyourfuture]

Is there any downside to you (or me) to the broker borrowing your (or my) shares?

I don't know ?
That's part of reason I posted. Thought others who are more knowledgeable in this area might add to the post, & some did.

 

[ownyourfuture]

Actually I understand that the broker can lend shares only from a margin account. If you have a cash account, then your shares can't be lent out.

I have a non-margin cash account. So if what you state is true, my shares are never borrowed. I'll call fidelity & make sure this week.

Thanks for the info

 

[ownyourfuture]

If you really believed a company was in trouble, you could sell all your shares in that company, and buy it's competitors or wait for the price to drop a lot and buy back in, or simply forget about that company as an investment.

That wasn't what I was asking. As you said, if I had a stock that was underperforming, I would simply sell it.

I was simply asking for others opinions regarding the subject of their shares being borrowed to short-sellers.

 

[audreyh1]

Fidelity tells me that that they can't loan my shares because I do not have a margin account.

Otherwise my dividends might not be qualified.

 

[ownyourfuture]

Fidelity tells me that that they can't loan my shares because I do not have a margin account.

Otherwise my dividends might not be qualified.

Thanks!

 

[Totoro]

Two issues come to mind:

1. There is counterparty risk when lending out is involved, however small.
2. You can stimulate a short squeeze thereby forcing up your stocks in value.

The first item is negligible risk if you are with a reputable broker. Still, to be aware of.



To play the second game you need to be big, smart and fast acting. If there are no shares to buy and a short seller has to deliver ..


My shares are available for lending. That lowers my transaction fees to rock bottom levels (free in some cases), so happy with it.