I have a question about shorting.

[CHOPTALK]

I have never shorted a stock yet, but im looking into it.

Based on what I read there is something I dont understand that makes no sense to me.

Maybe someone here can help me out.

Based on everything I read shorting a stock does not expire like an option does.

I dont understand why.

Does this mean that I can just borrow a stock and never sell it back?
I dont understand how there is no deadline for me selling the stock back.

I have traded a few options, but they all have a certain time that you have to close them out.

Thanks

 

[tiznow]

Occasionally your "lender" (broker) will force you to cover/buy it back but other than that you can be short as long as you like

 

[tiznow]

That and margin calls can force covering....you short using a margin account

 

[CHOPTALK]

What if you short a stock and the company goes bankrupt?

Do you lose the ability to buy the shares back if they are no longer on the market?

 

[tiznow]

What Happens If a Stock That I am Short Goes Bankrupt?




inShare


This is a common question that I often here from people that short-sell. What happens if a stock that I am short gets halted and announces their bankruptcy?

First off, as a short-seller, this is your ideal scenario. Nothing says "worthless common stock" better than a bankruptcy. The only downside to being short a stock that announces its bankruptcy is that your money can be tied up for a little while. Companies don't just announce they are going bankrupt out of the blue; they are always many warning signs, so if you are already up huge on your short position and the stock is trading for pennies, you may want to cover your position and move on.

If you are still short when the stock announces its bankruptcy, here is what will usually happen. The stock will announce that it is going bankrupt and the shares will halted. You will obviously not be able to cover your position in the stock at this time. The stock will then be delisted from whatever stock exchange that it is trading on. Considering that common shareholders are the last to receive anything in the case of a bankruptcy, you can pretty much safely assume that if the stock does eventually emerge from bankruptcy, the current common shareholders will receive nothing. More often than not, the company will just disappear, selling assets off to pay off creditors.

Eventually, your stock broker will mark the position down to zero (meaning that the value of the common stock in their eyes is nothing) and you will be able to cover your short position for a 100% gain. As I said though, this can take a while, so you may want to cover your position when you have the chance and move on if you don't want to wait.

 

[CHOPTALK]

If I have a 20K margin account, and the stock goes below 20K do I have to sell back at that point.
BTW, thats hypothetical because I would never let a SS get that far out of hand, but its something I would like to know anyway.

Thanks.

 

[tiznow]

This is an example being long using a margin account work same way whether u long or short....

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http://www.investopedia.com/university/margin/margin2.asp

Our focus in this section is the maintenance margin. In volatile markets, prices can fall very quickly. If the equity (value of securities minus what you owe the brokerage) in your account falls below the maintenance margin, the brokerage will issue a "margin call". A margin call forces the investor to either liquidate his/her position in the stock or add more cash to the account.

Here's how it works. Let's say you purchase $20,000 worth of securities by borrowing $10,000 from your brokerage and paying $10,000 yourself. If the market value of the securities drops to $15,000, the equity in your account falls to $5,000 ($15,000 - $10,000 = $5,000). Assuming a maintenance requirement of 25%, you must have $3,750 in equity in your account (25% of $15,000 = $3,750). Thus, you're fine in this situation as the $5,000 worth of equity in your account is greater than the maintenance margin of $3,750. But let's assume the maintenance requirement of your brokerage is 40% instead of 25%. In this case, your equity of $5,000 is less than the maintenance margin of $6,000 (40% of $15,000 = $6,000). As a result, the brokerage may issue you a margin call.

If for any reason you do not meet a margin call, the brokerage has the right to sell your securities to increase your account equity until you are above the maintenance margin. Even scarier is the fact that your broker may not be required to consult you before selling! Under most margin agreements, a firm can sell your securities without waiting for you to meet the margin call. You can't even control which stock is sold to cover the margin call.

Because of this, it is imperative that you read your brokerage's margin agreement very carefully before investing. This agreement explains the terms and conditions of the margin account, including: how interest is calculated, your responsibilities for repaying the loan and how the securities you purchase serve as collateral for the loan.

 

[CHOPTALK]

yikes!

Thanks Tiz

 

[RoofTop]

What if that stock has a dividend? Who pays it?

 

[tiznow]

U do (the person shorting it)