Short Selling Related FAQs
What is short selling?
Short selling is a strategy employed when one anticipates a decline in the price of a stock. Instead of owning the stock, it involves borrowing shares from a brokerage to sell them. Should the stock's price drop, you can buy the stock back at a lower price and return it to the brokerage, profiting from the price difference.
For instance, let's say the market price of a stock is $100 per share, and you believe it will decrease. You borrow 100 shares from a brokerage and sell them, generating $10,000. Consequently, your share count is -100. If the stock's price falls to $50 per share after some time, you can repurchase 100 shares for $5,000 and return them to the brokerage, keeping the remaining $5,000 as your profit from short selling.
How do I short sell US stocks?
Short selling involves borrowing securities from Long Bridge Securities Pte Ltd, using your assets as collateral, and selling them. Where you have not done a buy trade on the same day to cover your short sell position, subject to your agreement, Long Bridge Securities Pte Ltd is to borrow shares on your behalf (i.e. stock borrowing and lending facility) to facilitate the share delivery of the short position. A borrowing fee, based on the stock and the borrowing duration, will be charged. Do note that this facility is only applicable for trading in the US market.
To short sell a stock, you execute the sale via the trading interface, a process possible only if you have no long positions in the stock. The maximum quantity you can short sell is displayed in the trading interface, influenced by your account's net asset value and the stock's availability in the lending pool. It's important to note that engaging in short selling also reduces your buying power.
How do I know which stocks can be shorted?
You can visit the individual stock details page and examine the supplementary information in the upper right corner. If it displays "Support Shorting," this indicates the stock is eligible for short selling. By tapping on "Support Shorting," you can access specific details like the required margin for shorting, interest rates, lending pool quotas, and more. Please be aware that the list of stocks eligible for short selling may change periodically based on company policies and market risks.
Will there be a margin call for short selling? Under what circumstances will a margin call be triggered after short selling? Under what circumstances will there be a risk of forced liquidation?
Yes, short selling is considered a type of securities financing. Therefore, a margin call will be issued if the net asset value falls below the maintenance margin requirement. Similarly, a force-selling call will be initiated if the net asset value drops below the force-selling margin requirement or when the deadline for a margin call is met. Please be aware that in instances of significant market volatility, Long Bridge Securities reserves the right to close positions in the account at our discretion, without further notice.
Does short selling affect the credit limit?
Yes, the credit limit will be utilized for short selling if there is insufficient cash to meet the initial margin requirement. To provide clarity, below are two examples illustrating this:
Example 1: Client A holds a long position in US stocks with sufficient buying power but lacks cash. They decide to short sell 1 share of AAPL.US at $130 per share, where the initial margin requirement is $50. Consequently, the broker lends Client A $50 for the short sell, utilizing $50 of the client's credit limit.
Example 2: Client B has a long position in US stocks, possesses sufficient buying power, and $100 in cash.They decide to short sell 1 share of AAPL.US at $130 per share, where the initial margin requirement is $50. Since Client B has enough cash to cover the margin without needing a loan from the broker, their credit limit remains unaffected.
What are the fees incurred during short selling?
There are two types of fees associated with short-selling.
The first type includes commission, platform fees, and third-party fees incurred when buying and selling stocks.
The second type is the stock borrowing fee, which may vary depending on the stock and will accrue until the short position is covered or bought back. The specific rate can be viewed on the margin information page, accessible from the stock details page.
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How is stock borrowing fee calculated?
The daily stock borrowing fee = Daily quantity of short-sold stocks that have been settled * [(Closing price * 102%) rounded up] * The reference stock borrowing fee rate / 360.
Note: The stock borrowing fee is calculated daily, based on daily closing price and reference stock borrowing fee rate on each day, and is deducted at the end of the month. For specific charges, please refer to the monthly statement.
The reference stock borrowing fee rate may vary for each stock at different times. Please check the individual stock details page for specific information.
When does stock borrowing fee begin to accrue for short-selling ?
The stock borrowing fee starts accruing after the stock settlement is completed (e.g., T+1 for the US market) and is charged at the end of the month. Note that the stock borrowing fee is not deducted daily during the short-selling period. However, it is calculated on a daily basis and impacts buying power. Therefore, it's crucial to ensure your account has sufficient net asset value to meet the maintenance margin requirements.
How do I transition from a short position to a long position?
To close a short position, you must first buy back the shares you've shorted before placing any new buy orders. For instance, if you hold a short position of 200 shares in BABA, you need to repurchase these 200 shares to close the position. Should you attempt to directly buy 400 shares, the order will not be processed successfully.
What are the precautions for short selling stocks?
Limited Eligibility for Shorting
Not every stock is eligible for short selling. Certain stocks, particularly those with very low prices or limited liquidity, may not be allowed to be shorted. Furthermore, for stocks with limited liquidity, there may be instances where an order is placed successfully but the stock cannot be borrowed for the transaction, making short selling impractical at times.
Restriction on Simultaneous Long and Short Positions
It's important to note that you cannot hold both long and short positions on the same stock within the same securities account. If you attempt to short sell the same quantity of stock you currently hold, it will be treated as closing your position. Selling more than you own will cause the order to be rejected.
To initiate a trade in the opposite direction, you must first close your existing position (i.e., sell your held shares) and then place the new short selling order. For instance, if you possess 200 shares of BABA and wish to short sell, you must sell these 200 shares before placing a short selling order. An attempt to directly sell 400 shares will lead to order rejection.
Similarly, if you have shorted a stock and wish to buy a greater number of shares than your short position, the order will not proceed. You must first cover the short position (i.e., repurchase the shorted shares) before placing a new buy order. For example, with a short position of 200 shares in BABA, all 200 shares must be bought back before executing a new buy order. Attempting to purchase 400 shares outright will result in order failure.
If a dividend is paid while you are short selling, the short seller must compensate the lender with the equivalent dividend amount.
When you short sell a stock, you're selling shares you've borrowed, not owned. Therefore, any dividends paid during your short selling period are rightfully owed to the lender of the shares. If a dividend is distributed while you hold a short position and you still maintain that position one trading day before the ex-dividend date, Long Bridge Securities will deduct the equivalent dividend amount from your account on the dividend payout date. To avoid this charge, you can close your position one trading day before the ex-dividend date.
The risks of short-selling (securities financing) in US stocks include:
Asymmetrical Risk and Reward
The asymmetry between risk and reward is an inherent risk of short-selling. Theoretically, when an investor buys a stock, the maximum potential loss is the stock price dropping to zero, which equals a loss of 100%. However, when an investor short sells a stock, the potential loss is unlimited as the stock price could continue to rise, potentially resulting in a loss of 200%, 300%, or more.
Time Cost
Time factor must be taken into consideration when selling short. On the one hand, short selling incurs interest costs every day, which accumulate over time. On the other hand, the greatest uncertainty in short-selling comes from time. If investors hold a short position for a long time, they may have to endure losses caused by fluctuations in stock prices.
Borrowing Risk
After placing a short-selling order, the borrowing fee rate remains variable. The borrowing fee that investors ultimately pay is calculated based on the actual borrowing fee for each day from T+1 and is settled monthly. No one can predetermine the short-selling borrowing rate. If the short-selling demand for a stock significantly increases during the period when investors hold its short position, it may lead to a substantial increase in borrowing fee rate, and investors will have to bear the increased short-selling costs. In some cases, this may result in losses in the short position.
Corporate Actions
Some corporate actions (such as mergers, acquisitions, dividend payments, etc) may increase short-selling costs. For example, when a company announces a dividend payment, it usually reduces the supply of the shares in the market, which may lead to higher short selling costs.
Delisting and Suspension
When a stock is delisted or suspended from trading, investors may not be able to cover their short positions because the stock cannot be traded. However, the securities financing activity is still recorded and it can only be terminated when the delisting process is completed or trading is resumed. This process may take several days, months, or even longer, especially when the company undergoes bankruptcy liquidation. During this period, investors have to continue to pay securities borrowing fees based on the delisting price or the price of the latest trading day, which can sometimes be very high.